A Permanent Minimum Wage Solution
With the Biden administration starting to hit its stride in its second week, putting forth policy proposals that, for the most part, are good for the country, I feel it’s necessary to step back and take a breath. It’s been a minute since policy coming out of the White House has been worthy of debate, and many of us—policymakers included—are having a little trouble getting our bearings.
It goes without saying there is plenty that needs to be done by the Biden administration in the coming months. Our economy is holding on by a thread, the pandemic seems to be getting worse even though vaccines are being distributed, and partisanship is still creating drags on policy development. But regardless of the administration's need to act on these issues and others, it shouldn't act in haste by pushing through legislation that has been neither fully developed nor thoroughly debated. There is a natural tendency for new administrations to come out of the gate fast, break a little too early, and leave real policy progress wanting at the finish line, which seems to be what is happening with the administration’s push for a national $15 minimum wage.
I wrote about the $15 minimum wage in a July 2019 piece where I argued that, by focusing solely on the minimum wage’s dollar figure, politicians routinely miss the real challenge with our minimum wage: a lack of consideration for local costs of living and inflation.
Now every economist I know would tell you a $15 minimum wage is probably a bad idea. It’s actually an issue that, regardless of political persuasion, economists are generally aligned on. This is because a $15 national minimum wage is highly inefficient. Does the minimum wage need to be adjusted upward? Yes. Does it need to more than double? Absolutely not. The reason why is because our national economy is made up of thousands of local economies that have vastly different costs of living. $15 per hour may be great for workers—and even some businesses—in urban areas like Los Angeles or New York, yet inconceivable in lower cost of living areas like Fort Wayne, Indiana or Brownsville, Texas. In these lower cost of living areas, businesses will be forced to comply with $15 per hour because they have to, but they will likely cut staff or the number of hours employees can work if such a large increase happens overnight. Anyone who fails to acknowledge this reality—and the economic differences at the regional, state, and municipal levels—shouldn’t be the ones in charge of national economic policy, yet our leaders continue to set minimum wage policy using the same antiquated approaches.
A common rebuttal from my friends on the left is "But don’t we have to do something if people working 40 hours a week, in the richest country in the world, still live below the poverty line?” Of course—and the solution is rather simple: pick a wage that reduces poverty and is affordable for employers, adjust for regional costs of living, then peg to inflation.
Let’s take this in parts. First, pick a reasonable wage. For 2021, the national poverty line for a family of four is set at $26,500, so a person working 40 hours a week for 50 weeks a year (with two weeks of unpaid vacation) can meet the poverty line at $13.25 per hour. That said, shooting for the poverty line shouldn’t be our goal; we should aim higher. But if the other spouse chooses to work, the family of four is well above the poverty line. If only one parent is able to work, we at least have the entire working population out of poverty.
The second step is adjusting for the regional costs of living. While the national poverty line doesn’t take into consideration the cost of living in different areas, the Department of Health and Human Services does break it down by state, which is a big help for policymakers. At a minimum, every state should allow full time workers to support a family of four at or above the state's poverty line. Unfortunately though, this isn’t the case; state legislators are very much dropping the ball, which is why we need a national approach. But merely taking the state poverty line and working backwards to arrive at a per hour wage is a rather blunt way to approach the issue because such methodology doesn’t take into account within-state differences in cost of living. In some urban areas, $13.25 is a pretty low wage, whereas in more rural areas, this may be too much for businesses to take on without changes to employment. This is why we need a national minimum wage indexed to local cost of living. Yes, it’s a big ask, but it’s achievable. There are organizations already calculating these numbers to a fairly accurate degree. However, if we want to do this the right way, we need to commission the federal government to collect and publish local cost of living data so we can get a reliable picture.
Last is pegging the local number to inflation. This is where things get dicey. Since inflation is calculated in many different ways, and typically calculated at the national level, it is somewhat incongruous to peg a local wage to national inflation. This approach isn’t perfect, to be sure, but attaching an inflation measure (such as the national consumer price index) to the minimum wage will at least ensure wages don’t lose purchasing power year over year, which is what happens currently. Recognizing this analytical mismatch of national inflation and local cost of living—which is calculated by measuring price changes of goods at the local level like food, taxes, housing, and healthcare—it is important that the cost of living index does its best to capture these mismatches, which is why the cost of living index needs to be as dynamic as possible. If costs in a locality go down, the minimum wage will adjust in a similar manner. If they go up, the inverse happens.
The bottom line is that our national minimum wage needs to be inflation adjusted so consumers don’t lose purchasing power; adjusted for local costs of living so workers across the country are treated equally given their local economy; and initially set so all those who work 40 hours a week are above the poverty line. This is ambitious, yes. But it’s also achievable. And if they can work past their political differences, Congress can ensure that no working American lives in poverty.