Should Washington force a hike in the federal minimum wage, or should market forces assess entry-level labor cost? A move by one national retailer to lift its entry wage floor provided some fodder for minimum-wage hike advocates, but the tale of two retailers in this CBS News report shows why that decision is best left to the marketplace. First, The Gap announced that it would adjust its “minimum wage” to the level proposed by Democrats by mid-2015, calling it an “investment” rather than a political issue. Kim Peterson at Moneywatch concludes that The Gap will earn significant rewards for its voluntary decision:

Lowering turnover. It’s harder for employees to leave for better-paying jobs.

Higher-quality workers. By paying more, Gap presumably will attract more qualified employees.

Happier, more committed employees. This is something Costco (COST) says it has experienced by paying a minimum of $11.50 an hour. “Instead of minimizing wages, we know it’s a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty,” said Costco CEO Craig Jelinek last year, according to CNN.

Happier customers. “You treat people well, they’ll treat your customer well,” Topeka Capital Markets analyst Dorothy Lakner told Bloomberg.

Yes, yes, yes, and yes. All of these are true — when such a move is made for competitive reasons in a labor market. As a hiring manager myself for years in call centers, I can relate from my own personal experience that businesses have to make this call constantly, especially when jobless rates are low and new hires are hard to find. I spent many an hour over 15 years attempting to calculate means and medians for wages in our general industry in the local market and trying to keep pace with wage growth.

But there’s more to this, too. The Gap is, as Peterson points out, a high-end retailer where price pressures are nearly non-existent. No one shops at The Gap for bargains; they go for high-quality merchandise and extraordinary service. Gap sold $16.2 billion with an estimated profit of ~$1.3 billion for a margin of 8% — not bad in a stagnant economy, but hardly windfall profits for shareholders. They can afford to aggressively bargain for entry-level labor, to a point.

Compare that to the other retailer Peterson uses in the analysis, Wal-Mart. This retailer faces enormous price pressures as a discount store, without the high-quality merchandise in many (but not all) of its departments. What does Walmart want to do about its competitiveness in the labor market? It’s mulling over whether to throw in its support for a national minimum-wage hike:

Raising wages would be a bit harder to do at Wal-Mart (WMT), for example, a company that already operates on thin margins and has struggled to grow even as the economy recovered from the Great Recession. Still, Wal-Mart says it’s looking into supporting an increase in the federal minimum wage, Bloomberg reports.

One retailer can compete for labor. One wants to push rent-seeking legislation to negate that competition. Raising the minimum wage would force The Gap to increase its wages again, which sooner or later will create price pressures from labor cost or the need to reduce staff to meet efficiency and margin requirements. It eliminates the natural competition for that labor and reduces job opportunities that would make the market even more competitive, as the CBO noted in its analysis.

Instead of trying to micromanage compensation in the economy, Congress and the White House should be focusing on reducing regulatory and tax disincentives for investment and job creation. That would actually produce competition for labor that has been left on the shelf in the Obama recovery, rather than stifle it through rent-seeking regulation pushed by the big players who have most to lose from that competition.

Update: Public universities in Illinois can’t unilaterally increase their revenues — and are very worried about the impact of a minimum-wage hike (via NewsAlert):

With lawmakers warning of tough budget times in the fiscal year beginning July 1, the proposal to bump the wage from its current level of $8.25 an hour to $10 or more an hour is raising red flags among university officials.

At Southern Illinois University, for example, President Glenn Poshard said an increase could cost his institution $3.2 million in additional wages at a time when the General Assembly may be considering further cuts in aid to higher education.

“We need an increase in funding in higher education,” Poshard told members of a House appropriations panel Thursday. “We don’t have any extra to run our university.”

Similar scenarios are being played out in Normal, Charleston, Macomb and other university communities.

And guess what happens when those costs go up?

Eastern Illinois University predicts an increase will cost about $940,000. And, because the university has committed to no tuition increase next year, a minimum wage hike likely would trigger a reduction in the number of student workers, said Derek Markley, chief of staff to President Bill Perry.

Funny how that works …