Rising Pay Undermines Push for Increasing the Minimum Wage

A Department Labor report released Friday shows wages rising 4.5 percent, evidence that the Biden administration’s plan to raise the federal minimum wage to $15 is unnecessary. Encouraging a strong labor market is a better way to help workers. Wages are going up not because employers are complying with lawmakers’ guess of what the right level of pay should be, but because of simple supply and demand. Workers currently have the power to insist on better pay—and they’re using it.

Not only are workers earning more, often much more, companies are doing more to keep workers happy to retain them. That creates incentives to ensure that wages and benefits remain competitive and that workplaces are safe and well-managed. It’s more flexible too. Business that cannot afford to pay workers more can use other enticements like more benefits, flexible scheduling, or remote work to attract staff. And if that’s not good enough for those workers, better-paying jobs are available.

Under a high minimum wage, lower skilled workers may earn more but they aren’t more valuable to employers because the higher pay isn’t a function of supply and demand. Companies therefore try to mitigate the higher labor costs by doing things like giving workers fewer hours or by automating tasks.  Workers earning above the minimum, meanwhile, don’t get an increase in their wages. In fact, the relative value of their wages declines because the floor has been raised.

The current tight labor market is happening not because of the Biden administration’s policies, at least not intentionally. It is a consequence of several factors: a strong economy that existed prior to the administration, declines in immigration to the U.S., the baby boom generation slowly exiting the workforce, and a shortage of workers brought about by the COVID-19 pandemic. Many workers have opted to drop out altogether. The administration’s COVID response policies, which made it easier for people to stay home and fall out of the habit of working, likely contributed to the last factor.

Unfortunately, rising wages also bring the likelihood of higher inflation eroding those gains. Consumer prices have already risen over the past year and are likely to continue to rise as workers get more spending money. That said, it is still better to have wages rise naturally than to have them forced upward by government regulation. A higher minimum wage would also likely prompt inflation due to low-wage workers getting more spending money, but without a strong labor market, other wages won’t rise in tandem to compensate. Everyone is left poorer.