The long-lasting damage of a national wage


(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.

    Tweet This

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

    Tweet This

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

    Tweet This

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. 

Also Visit
AEIdeas Blog The American Magazine
About the Author


Andrew G.


Mark J.

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 27
  • 28
  • 29
  • 30
  • 31
Monday, October 27, 2014 | 10:00 a.m. – 11:30 a.m.
State income taxes and the Supreme Court: Maryland Comptroller v. Wynne

Please join AEI for a panel discussion exploring these and other questions about this crucial case.

Tuesday, October 28, 2014 | 9:30 a.m. – 12:15 p.m.
For richer, for poorer: How family structures economic success in America

Join Lerman, Wilcox, and a group of distinguished scholars and commentators for the release of Lerman and Wilcox’s report, which examines the relationships among and policy implications of marriage, family structure, and economic success in America.

Tuesday, October 28, 2014 | 5:30 p.m. – 7:00 p.m.
The 7 deadly virtues: 18 conservative writers on why the virtuous life is funny as hell

Please join AEI for a book forum moderated by Last and featuring five of these leading conservative voices. By the time the forum is over, attendees may be on their way to discovering an entirely different — and better — moral universe.

Thursday, October 30, 2014 | 2:00 p.m. – 3:00 p.m.
A nuclear deal with Iran? Weighing the possibilities

Join us, as experts discuss their predictions for whether the United States will strike a nuclear deal with Iran ahead of the November 24 deadline, and the repercussions of the possible outcomes.

Thursday, October 30, 2014 | 5:00 p.m. – 6:15 p.m.
The forgotten depression — 1921: The crash that cured itself

Please join Author James Grant and AEI senior economists for a discussion about Grant's book, "The Forgotten Depression: 1921: The Crash That Cured Itself" (Simon & Schuster, 2014).

No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.