Minimum-wage debates have inevitably gotten bogged down by the large regional differences in living costs. When Democrats bring back a proposal for a minimum-wage hike (cut from the recent stimulus package by the Senate parliamentarian), they can finesse this problem by enacting a regionally adjusted federal minimum. This would be smarter economics and smarter politics. It would appeal to centrist Democrats, some of whom are uneasy about an across-the-board jump to $15, and potentially to Republicans. And a regionally adjusted minimum would do less harm to the poorest parts of the country.
Many states already have their own minimums. But this federalist approach is broken. Twenty-one states do not set minimums above the federal floor of $7.25 an hour — which was last raised in 2009. Since then, adjusted for inflation, that wage has lost one-fifth of its purchasing power, while the stock market has tripled. Even in most richer states, the legal minimum has fallen far below its traditional ratio to market wages. Economists say the federal minimum should be a guarantee — a floor for states unwilling to go higher.
But Congress hasn't touched the issue since 2007 (when it mandated the 2009 increase), principally because any minimum wage has trade-offs: It creates both positive and negative effects. Higher minimums increase wages for those working at or near the baseline. They improve worker morale and productivity, and reduce turnover and training expenses. On the other hand, when minimums rise above a certain threshold, they result in job losses and lower profits (including for small businesses struggling in the pandemic). Employers pass along some of the higher labor costs to their customers — many of whom (think Walmart and McDonald's) are also low-income. The Congressional Budget Office forecasts that raising the national minimum to $15 over several years would deliver $333 billion more in wages to low-paid workers. But that's a net gain, the result of a positive ($509 billion more to those employed) and a negative ($175 billion less because of 1.4 million lost jobs). Similarly, the CBO says a $15 minimum would modestly increase the federal deficit through a combination of costs (such as higher unemployment compensation) and savings.
When economists talk about the minimum wage, they envision a "sweet spot," or a range, that best accommodates these trade-offs. But the sweet spot is drastically different across the country. It even varies within states. Chicago's living costs are 35 percent higher than those in Danville, in east-central Illinois, according to the Pew Research Center. Nationally, the variations are greater. The cost of living in Manhattan is three times that in Joplin, Mo. The biggest variant is housing, but it isn't the only one. The average cost of a chicken sandwich in Bakersfield, Calif., is $5.73, compared with $3.07 in Findlay, Ohio. While there is no consensus on the ideal minimum, economists have a useful heuristic for determining a reasonable level. Many suggest 50 to 60 percent of either the median or average hourly wage. But hourly wages also show sharp regional variations. Any wage that would satisfy workers in San Francisco would be untenable in West Virginia. (Ask Sen. Joe Manchin.) Any wage that protected jobs in West Virginia would be meaningless for workers in Boston.
As Arindrajit Dube, a University of Massachusetts economist, argued in 2016, "A one-size-fits-all approach creates avoidable trade-offs." Most economists agree that small increases in the minimum have not historically resulted in significant job losses. The rub comes when they try to define "small." Michael Strain of the American Enterprise Institute has argued that $15 would "wreck" the economy. However, there has been some shift in the profession toward a more liberal stance. As recently as 2019, Dube cautioned, "We are currently witnessing minimum wage increases that go beyond our experience of the past few decades." Last month, he argued that the CBO estimate of job losses at $15 was significantly overstated. Several states, including Florida, have legislated paths to $15.
Much of the debate over job losses is concerned with service jobs, because those are generally the lowest paid. To some extent, such jobs are protected, because you can't move them. If you live in Pennsylvania, you cannot order a hamburger in Mississippi. But such positions are vulnerable to labor-saving shortcuts. A restaurant can decide to order precut vegetables instead of hiring someone to slice them. Or it can dismiss its waitstaff and serve customers at a counter. (There is conflicting evidence about the effect on service jobs in Seattle, which in 2014 passed a gradual rise in its minimum to $15. Overall, some 46 cities and counties have local minimums above state levels, most of them in California.)
Unlike service jobs, factory jobs — "tradables — can be moved. Economists left and right, from Harvard's Lawrence Katz to AEI's Strain, say that at a $15 minimum, low-end factory jobs in the lowest-wage states would be threatened by overseas labor. That would increase potential job losses, particularly in poorer states. A higher minimum could act like an internal tariff, eroding the competitive advantage of such states. "There are losers in any minimum-wage policy," says Mark Zandi, chief economist at Moody's Analytics, who favors going to $15 nationally by 2025. If the wage is set too high, he adds, "the losers are the poorest workers in the poorest regions." The impasse has resulted in a policy of doing nothing. As of December, the average hourly wage in the United States was $25.15. That would suggest a minimum wage of $12.58. Only six states and Washington, D.C., have enacted a minimum of at least $12.50.
As a means of breaking the logjam, Third Way, a moderate Democratic think tank, proposed a regional wage in 2019, which would have established a five-tier minimum determined by local living costs. Supporters such as Rep. Terri Sewell (D-Ala.) said the plan would give workers a boost while protecting small businesses in distressed areas. After the proposal was introduced in Congress, it drew only 12 co-sponsors, all Democrats, and went nowhere.
But New York and Oregon have adopted regional variations within their states (for instance, the standard minimum in Oregon is $12, but it is $13.25 in Portland and $11.50 in rural areas). Dube has argued that the United States could boost wages while respecting regional differences if each state raised its minimum to 50 percent of the local median wage. But it isn't clear what would induce 50 legislatures to act in lockstep (or to act at all).
The minimum wage isn't a panacea for poverty. Fewer than 2 million people are paid the federal minimum (including some tipped workers and others who earn less). Some economists say cash transfers, such as a juiced-up earned-income tax credit, would do more to help the poor, and many prefer the two approaches in combination. Still, according to Dube, if every state required a minimum of half the local median, it would lift 2.2 million Americans out of poverty.
In the new Congress, every Democrat is on record supporting a hike, and President Biden supports a national $15 wage. But $15 does not have 60 votes in the Senate; even if the filibuster were scrapped, it might not have 50 votes. The left wing of the party opposes a regional plan, calling it a capitulation. A fact sheet issued by the left-leaning Economic Policy Institute called a regional wage "fundamentally flawed." But it's hard to understand why, say, $12 with regional variations up or down would be worse than the existing $7.25 (individual states, of course, would still be free to go higher).
A U.S. regional minimum could be enacted in one swoop. It would get closer to the sweet spot in every state. And on the merits, it should appeal to people across the political spectrum interested in boosting wages and minimizing the negative effects.