State Flexibility: The Minimum Wage and Welfare Reform


Congress may soon be considering a hike in the national minimum wage under dramatically different circumstances then existed in prior debates. The primary changes result from the welfare reform law of 1996. That law, designed to “end welfare as we know it,” imposed enormous burdens on state governors to increase the workforce participation rate for families receiving public assistance. Today each state confronts new and unique demographic and geographic challenges in moving welfare recipients into the workforce. But they do not have all of the tools they need to get the job done. In fact, they may have their efforts sabotaged by a simple extension of old thinking — a “one size fits all” federal minimum wage rate.
The State Flexibility Approach
Under the State Flexibility approach to the national minimum wage, states would be given the authority to enact laws through which they waive some or all of a federally mandated increase, so long as the current federal minimum wage rate is maintained as a floor. Each state would have the opportunity to decide whether a new national wage standard is appropriate for area labor market conditions, particularly in light of the state’s responsibilities to move low-skilled welfare recipients into the workforce.

In the mid-1960s Congress expanded the minimum wage law (first passed in 1938) to cover industries which employ predominantly semi-skilled, low-skilled, and entry-level workers, e.g., agriculture and retailing. During the same period when the federal government was extending the minimum wage into new industries, Congress created and expanded social welfare programs such as food stamps and other basic welfare benefits. These programs insulated low-skilled workers who were being priced out of job opportunities because they did not qualify for positions that were newly covered by the minimum wage.

In 1996, Congress substantially reduced the size of these federal welfare programs. Thus, in 2001,Congress will be debating a national minimum wage hike that will affect low-skilled people who have dramatically fewer options if they cannot find work.

Welfare reform has altered the minimum wage debate in ways that were unanticipated. Research proves that higher mandated wages reduce employment opportunities for the least skilled. This effect is magnified for the welfare population, with studies showing higher minimum wages (1) lead to longer spells on welfare and (2) cause shifts in the profile of “who gets hired,” leading employers to favor higher-skilled applicants at the expense of low-skilled adults.

When Members of Congress next vote on a minimum wage hike, they will be voting on a policy that is different from any wage mandate for entry-level jobs considered in the past. This distinct shift in the environment demands that Congress adopt an entirely new perspective on the minimum wage. Having been given the responsibility to bring welfare “clients” into the work force, governors need the flexibility to adapt their minimum wage policies to the local, economic, demographic and development needs of their states. Most federal labor laws have recognized some state involvement and flexibility in setting area standards. Without a shift in federal policy, states will find their local welfare reform efforts stymied by federal law. The new state focus on welfare reform suggests that the state flexibility approach be applied to the national minimum wage, with the federal government insuring against a rollback of the current wage floor. Congress should grant governors authority over their own labor markets to match their new responsibility for creating employment opportunities for those who have great difficulty getting hired.

Practical Implications
Under the State Flexibility approach to the national minimum wage, each state would have five options going forward:

Raise the state wage at the same pace as the federal minimum wage rises above $5.15 per hour. This would happen automatically if states take no action.
Keep the state rate constant at its current level, to reflect state and local labor market conditions.
Establish regional rates to address local economic, demographic and development needs in the state.
Raise the state rate, but more slowly than the federal rate hike, or to a rate lower than the federal minimum wage (but above $5.15 per hour).
Raise the state rate higher and/or more quickly than the federal rate hike.

States today already have the authority to implement a minimum wage rate that is higher than the federal rate. This proposal simply gives states the flexibility to set their own schedule and rate structure at or above $5.15 per hour.

Public Perspective
Research also shows that the public strongly favors state, rather than federal control, of the minimum wage rate. In six national surveys of public opinion, respondents were asked who is better suited to setting the minimum wage in their states. The federal government received an average of only 35% support from the public. The states, through the governors and the legislatures, were consistently deemed most qualified to make this important decision. Support for the states ranged from a low of 57% to a high of 64%.