The long-lasting damage of a national wage

Reuters

(L-R) US Labor Secretary Thomas Perez speaks next to Representative George Miller (D-CA) and House Minority Leader Nancy Pelosi (D-CA) at a "Give America a Raise" event to push the minimum wage to $10.10 per hour, on Capitol Hill in Washington April 3, 2014.

Article Highlights

  • Progressives are practically united in supporting an increase in the national minimum wage.

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  • Obama proposes raising the national minimum wage by almost 40% over the next few years to $10.10 per hour.

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  • Even fans of the minimum wage must concede that a national minimum wage has to have disproportionate effects by location.

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Progressives are practically united in supporting an increase in the national minimum wage. The only disagreement is by how much: President Obama proposes raising the national minimum wage by almost 40% over the next few years to $10.10 per hour and indexing it to inflation thereafter. Other progressives favor a higher $15 "living wage." Conservatives and most economists oppose raising the minimum wage because it will price low-skilled workers out of the job market, cutting the bottom rung on the ladder of economic opportunity. But there is one important issue that both groups may have overlooked - and that's the "one-size-fits-all" nature of the minimum wage.

Note that we call it the national minimum wage. It's a federally-mandated minimum wage that applies universally across the country; in cities, suburbs and rural communities; in places where the cost of living is high, such as Washington and New York, and in the countless small towns where the cost of living is far lower. And it's partly this uniform, "one-size-fits-all" feature of a national minimum wage that guarantees that it won't work well at all in thousands of America's low-cost communities

Let's assume that within a given labor market, there's some mandated minimum wage that would both increase pay for low-skilled workers and cause little or no increase in unemployment. Now, that's a pretty strong and unrealistic assumption given what most economists believe about the minimum wage. But let's ignore economic reality for a moment and assume that there might be some minimum wage, like $10.10 per hour, which will boost the incomes of low-skilled workers without lowering employment. Even in that case, imposing a uniform national minimum wage on every local community will inevitably reduce employment in many locations, because it artificially imposes a single minimum wage on every labor market in the United States without any consideration of the huge variation in the cost of living around the country.

For instance, in Pueblo, Colorado, the overall cost of living is 17 percent below the national average. If $10.10 was the "correct" national minimum wage, it should only be about $8.25 per hour in Pueblo adjusted for the lower cost of living there.

When the federal government imposes that same uniform national minimum wage of $10.10 per hour on a low-cost, low-wage labor market like Pueblo, that wage will be far above the appropriate wage for that community based on local market conditions and the relatively low cost of living. The results could be disastrous. Employers in Pueblo can't simply raise prices to pay for a 40 percent increase in the minimum wage to $10.10 per hour, since their customers - who also live in a low-cost, low-wage area - don't have the incomes to pay it. As a result, employers in small communities like Pueblo will find ways to economize on labor costs, such as eliminating positions, cutting hours, substituting machines and technology for workers, or reducing the growth of their workforces. Low-skilled workers will be most hurt in low-cost cities like Pueblo from a national minimum wage that isn't adjusted for local conditions and costs of living.

Nothing prevents high-cost cities or states from raising their minimum wage above the federal level. But low-cost areas like South Dakota are prohibited from setting their state minimum wage below the federal minimum, even if a lower minimum wage makes sense for their circumstances and would be the best policy for low-income workers. The "right" national minimum wage - again, meaning one that doesn't significantly hurt job opportunities for low-skilled workers in the majority of local labor markets - wouldn't be one calibrated to the U.S. labor market with an average cost of living and it certainly won't be based on cities such as New York or San Francisco. Instead, the only way for a single national minimum wage not to significantly hurt employment is to base it on low cost-of-living areas where wages are justifiably lower. Of course, that means that in high-cost labor markets this new minimum wage won't have much effect. The obvious conclusion - to anyone except members of Congress and the President, it seems - is that each area should be able to set its own minimum wage, consistent with its own cost of living.

Even proponents of the minimum wage must concede that a universally-applied minimum wage, without any adjustments for the significant differences in the cost of living across the country, has to have disproportionate effects by location. And proponents have to also agree that a minimum wage of $10.10 per hour will be far too high for low-cost rural areas, and will have adverse effects on low-skilled workers in those communities. Before raising the minimum wage to $10.10 per hour and permanently indexing it to inflation, we should carefully consider the long-lasting damage that will be inflicted on thousands of America's low-wage, low-cost communities from that "one-size-fits-all" national minimum wage.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI). Mark J. Perry is a resident scholar at AEI and professor of economics in the School of Management at the Flint campus of the University of Michigan. 

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Mark J.
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