“Localities, ‘Laboratories of Democracy,’ and the Minimum Wage”

June 3, 2014
By Oren M. Levin-Waldman, Ph.D.

Justice Louis Brandeis once referred to states as the laboratories of democracy. The idea was that policies first tried out at the state level, after initial testing and evaluation, might then be expanded to the federal level. In an era where more power and authority are centralized in the federal government, it is important to remember that local government serves an important and valuable function.

All too often, however, we see states, and even localities stepping up to the plate only when the federal government has failed to act.

This is clearly the case with the minimum wage. Several states as of the beginning of 2014 have already either enacted a minimum wage or raised their minimum wages. We are also beginning to see more local governments take the lead on the minimum wage. In New York State, several localities have petitioned the state legislature for permission to enact minimum wages that would be appropriate for their respective communities. New York City’s new mayor, Bill, De Blasio similarly intends to seek Albany’s permission to create a citywide minimum wage for New York City.

For guidance, these communities and other local communities looking to adopt their own minimum wages need look no further than San Francisco and San Diego. San Francisco has had its own minimum wage for several years now. The conventional wisdom holds that states and localities enacting their own minimum wages are playing Russian roulette with their economies because firms can move across either state or local boundary lines. But economists at the University of California at Berkeley have found the San Francisco minimum not to have the economic consequences long predicted by the standard model.

As of January 1st, San Francisco has the highest wage at $10.55 an hour. Moreover, there is broad support in favor of raising it to $15.00 an hour, and labor activists are poised to put it on the ballot for voters to decide the issue.  In San Diego, Mayor Todd Gloria proposed a ballot initiative that would raise the minimum wage to $13.09 over three years, with the argument that entire local economy will benefit.

That more communities are taking the lead on this issue at a minimum underscores the inadequacy of the federal minimum that is still $7.25. But it also demonstrates that cities are prepared to consider policies that are specifically suitable to their own needs, most notably their respective communities’ higher costs of living. This is clearly the case with both San Francisco and San Diego in a state that just raised its statewide minimum to $9.00 an hour.

It also demonstrates that localities are willing to take the lead and adopt bold measures at a time similar measures stall in the halls of the U.S. Congress. For decades, the issue of the minimum wage has been mired in partisan politics where each side of the debate couches it in terms of their own ideological biases. Conservatives typically focus on disemployment effects specifically among teenagers without considering any wider benefits to the larger economy. Meanwhile, liberals see it as an issue that helps the working poor, again neglecting to mention benefits to the broader middle class.

Increasingly, economists are coming to the conclusion that the data we have on the minimum wage is ambiguous at best. This ambiguity should be a basis for policy experimentation, and localities are now taking the lead. According to data from the U.S. Census Bureau’s Current Population Survey, the median hourly wage for full time workers in 2013 was $19.23 for both the U.S. as a whole and the state of California. Even assuming that the median wage might represent a tipping point — the point at which any minimum above would start to bite — it is probably safe to infer that a minimum wage at $15.00 an hour is still going to be below a market clearing wage, and all the more so with a $13.00 an hour wage.

And yet, the benefits to local communities could be enormous. The recent report of the Congressional Budget Office made it clear that at least sixteen million American workers would get a pay raise. When we consider that those earning in wage intervals above the statutory minimum will also get a raise, it isn’t hard to see how the benefits will trickle up the wage distribution into the broader middle class. Higher incomes will enable people to spend more, thereby increasing demand for goods and services, which can only help the economy grow.

Local communities, especially the larger cities, will also benefit because, as they are on the front lines of income inequality, the minimum wage will reduce wage inequality. That is, if wages rise at a higher percentage among the bottom than among the top, wage inequality will be reduced without having to resort to confiscatory taxation. But to the extent that rising wages help shore up the middle class, it too pushes back against rising income inequality. It is good to remember that income inequality isn’t bad per se, rather it is increasing income inequality that is the problem and that it represents the shrinkage of the middle class.

Local communities taking the lead on this issue only brings back to life Brandeis’s famous expression of states as laboratories of democracy. This idea certainly applied to localities, where the Framers of the Constitution believed democracy would have its fullest expression. That there have been no adverse effects in localities where borders are porous, suggests that the minimum wage is a viable policy at the national level.

June 2, 2014

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