Time to abolish the federal minimum wage

There is a real danger that a $15 federal minimum wage would slow the recovery and induce a long-term decline in employment. Even before COVID-19, sober mainstream analysis conducted by the Congressional Budget Office estimated that a $15 minimum wage would reduce employment by 1.3 million jobs in 2025.

To their credit, some leftof-center politicians and analysts have acknowledged this danger and suggested tweaks to minimum-wage policy designed to minimize job losses. It’s a noble goal, but their proposals would only make things worse.

The minimum wage is damaging not only because it induces employers to cut hours or let existing workers go. It’s also harmful because it dampens the incentives for, and flexibility of, entrepreneurs to develop new ways to employ people who are out of the job market.

Trying to fix the defects of a one-size-fits-all policy with exemptions and more regulatory complexity wouldn’t help. Instead, Congress should step aside and let states and localities determine what minimum wage is best for their residents. Freezing the federal minimum at $7.25 per hour would accomplish that to some extent. Some 90% of minimum wage workers already live in places with an hourly minimum between $7.50 and $15.

Or how about this: Abolish the federal minimum wage entirely.

It sounds radical. But it fits the kind of unorthodox tight-labor-market policies the Federal Reserve and the federal government have been following, successfully, for several years.

The first of these polices, from the Fed, is committing to zero interest rates until and even after inflation begins rising. Another, from the government, is cutting nearly a trillion dollars in business taxes and “offsetting” those cuts with hundreds of billions in domestic spending increases, leading to larger increases in employment than economists thought possible. Wages also started to rise faster for lower-paid workers than for high earners.

As a consequence, median household income surged to record levels just before the pandemic hit. These policies worked because they increased the demand for labor so much that employers were forced expand the type of workers they were willing to hire. And once hired, employees were given greater on-the-job training opportunities, while employers invested in techniques and practices to boost the productivity of relatively low-skilled workers.

Raising the minimum wage undermines this process. It leads employers to focus on finding the most employable workers — applicants who’ve sought out training for themselves, for example, and are ready to take advantage of the most advanced technology.

Entrepreneurs and local governments are in the best position to fashion policies that address their specific conditions. The best solution is for Washington to focus on maximizing macroeconomic conditions and leave the microeconomic solutions to the locals.