The debate over the minimum wage has been a longstanding and contentious issue in the United States. Over the years, various states have taken matters into their own hands, implementing minimum wage policies that differ significantly from the federal minimum wage. One intriguing aspect of this discussion is how a higher minimum wage in one state close to another can influence pay ranges in the lower minimum wage state. In this blog post, we'll explore this phenomenon and its potential implications for workers and businesses.
The Patchwork of Minimum Wage Laws
The United States is characterized by its patchwork of minimum wage laws. The federal minimum wage, established by the Fair Labor Standards Act (FLSA), sets the baseline standard, currently at $7.25 per hour as of my last knowledge update in September 2021. However, individual states have the authority to set their own minimum wage rates, which can vary significantly. For example, in 2024, the minimum wage for Washington State will increase to $16.28 an hour but in Idaho, it will remain at the federal rate of $7.25 per hour.
The Impact of Nearby States
When one state raises its minimum wage significantly higher than its neighboring states, it can create several noteworthy effects:
1. Labor Market Competition: Workers in lower minimum wage states may be drawn to higher wage neighboring states. For instance, if State A raises its minimum wage to $15 per hour, while neighboring State B maintains a minimum wage of $7.25, workers in State B may find it economically advantageous to commute or relocate to State A.
2. Pressure on Employers: Businesses in lower minimum wage states may face pressure to increase wages to remain competitive in hiring. If they fail to do so, they risk losing talent to neighboring states offering higher pay.
3. Consumer Spending: Workers who earn higher wages in neighboring states may have more disposable income to spend. This can lead to an increase in consumer spending in the higher minimum wage state and potentially benefit businesses there.
4. Inflationary Pressures: A sudden and significant increase in labor costs for businesses in higher minimum wage states can potentially lead to price increases for goods and services, contributing to inflationary pressures.
5. Policy Changes: Observing the effects of neighboring states' policies, lower minimum wage states may reevaluate their own minimum wage laws and consider raising them to attract and retain a skilled workforce.
6. Regional Disparities: As neighboring states adopt different minimum wage policies, regional economic disparities may widen, impacting the overall economic landscape of the area.
Other Areas Of Compensation To Consider
The adjustments in minimum wage impact how much executive, administrative, and professional workers plus computer professionals and outside salespeople must earn in salary to be exempt from the requirement to pay workers’ overtime. Those in Washington State must satisfy the higher state minimum salary test to classify an employee as exempt from FLSA overtime rules has also continued to increase.
The 2024 threshold for employers is 2 times the minimum wage. That means an exempt employee will have to earn at least $1,302.40 a week ($67,724.80 a year) in order to be classified as exempt from the overtime rules under FLSA.
Washington State Labor & Industries updated the rules for exempt workers in 2020, creating an eight-year implementation schedule that incrementally raises the multiplier until it reaches 2.5 times in 2028. However, the pace of the increase is based on the size of the employer and will become the same for small and large employers by January of 2026.
Under the same Washington State rules, exempt computer professionals may be paid an hourly rate rather than with a salary. The applicable hourly rate is 3.5 times the minimum wage, regardless of employer size. For 2024, that will be $56.98 per hour.
It's important to note that the impact of labor policies, including exempt status thresholds, can vary widely from state to state due to differences in economic structures, industry composition, and regional factors. While Washington's high threshold may not directly benefit other states in a straightforward manner, it can serve as a case study for labor policy discussions in neighboring states.
The impact of a higher minimum wage in a state close to another with a lower minimum wage is a complex and multifaceted issue. It can lead to labor market competition, economic pressures on businesses, changes in consumer spending, and potential policy adjustments. As states continue to grapple with the minimum wage debate, it is essential to monitor and study these effects to make informed decisions that promote fair wages and a strong economy. Ultimately, the interplay between neighboring states' minimum wage policies highlights the need for a coordinated approach to labor standards and wage regulations at both the state and federal levels.
Employers are encouraged to do periodic salary benchmarking to remain competitive in states with a lower minimum wage. If you would like to learn more about OmniaHR salary benchmarking services or if you have questions on the Washington State eight-year salary threshold implementation schedule for exempt status, contact OmniaHR today.