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A National Minimum Wage Is a Bad Fit for Low-Cost Communities

Wednesday, March 26, 2014

A one-size-fits-all minimum wage, without any adjustments for the significant differences in the cost of living across the country, will disproportionately affect low-skilled workers in low-cost areas.

Progressives are practically united in supporting periodic increases in the national minimum wage. The only disagreement is by how much: some, like President Obama and his fellow Democrats, propose raising the national minimum wage by almost 40 percent over the next few years to $10.10 per hour and indexing it to inflation thereafter; others favor almost doubling the current minimum wage to a so-called “living wage” of $15 per hour or more.

But 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, D.C., and New York; and in the countless small towns and cities where the cost of living is far lower. And it’s partly this uniform, one-size-fits-all aspect of a national minimum wage that guarantees that it won’t work as expected, or at least 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: despite the publicity given to a number of studies claiming that minimum wages don’t hurt job prospects for low-skilled workers, most economists still believe that a substantial increase in the minimum wage would hurt job growth. University of California economists David Neumark and Ian Salas show that many of the studies that claim no adverse employment effects of minimum wage hikes can produce this result only under very narrow terms, such as by evaluating employment over short periods of time or using a certain statistical technique. Using different time periods and applying alternate statistical methods to the same data, researchers have confirmed the conventional economic wisdom: that a government-mandated floor on wages reduces employment opportunities for low-skilled workers.

Most economists still believe that a substantial increase in the minimum wage would hurt job growth.

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 in certain labor markets. Even in that case, imposing a uniform national minimum wage on every local community will inevitably lead to adverse economic outcomes 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.

It’s easy to illustrate this point using data from the Council for Community and Economic Research’s (C2ER) Cost of Living Survey, which compares the costs of food, housing, healthcare, utilities, and transportation in more than 300 metropolitan areas around the country in 2013.

For instance, in Pueblo, Colorado, housing costs are almost 30 percent lower than in the typical U.S. metropolitan area, health care costs are 14 percent lower than average, food costs are 12 percent lower, and the overall cost of living there is 17 percent below the national average. Couldn’t a low-skilled worker in Pueblo easily get by on a lower minimum wage when their cost of living is significantly 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. 

Likewise, why would the appropriate minimum wage be the same in, say, Birmingham, Alabama, as in Manhattan, where the overall cost of living is 2.5 times higher in comparison? A minimum wage of $10.10 per hour that is “right” nationally for the average cost of living would be way too low in Manhattan and way too high in Birmingham. The map below shows how a national minimum wage of $10.10 per hour would have to be adjusted to match the specific cost of living in various cities nationwide (and here is a more detailed map of a national minimum wage and a living wage, adjusted for the cost of housing in each U.S. county).

Minimum Wage Adjusted

But even these comparisons don’t accurately capture the full extent of the problem with a single, national minimum wage, because the C2ER data are calculated only for larger metropolitan areas, where wages and costs of living tend to be the highest. It’s in the thousands of smaller rural areas across America, where the cost of living is generally extremely low, that an increase in a national minimum wage will have the greatest adverse impact on job opportunities.

The Department of Housing and Urban Development publishes data on fair-market rents at the county level. Because housing costs are so strongly correlated with an area’s overall cost of living, these data allow us to further estimate how a uniform national minimum wage disproportionately and negatively affects communities with low housing costs.

Employers in Pueblo can’t simply raise prices to help pay for a 40 percent increase in the minimum wage to $10.10 per hour, since their customers don’t have the incomes to cover such a cost.

Let’s assume — again against economic logic — that a $10.10 per hour minimum wage makes sense in areas like Worcester County, Massachusetts, Arapahoe County, Colorado, or Maricopa County, Arizona, where the cost of living is right at about the national average. But then how could the same uniform $10.10 minimum wage possibly make economic sense for Boone County, Arkansas, or Russell County, Kentucky, where housing costs are 40 percent below the national average? President Obama and his fellow Democrats propose to impose a single, one-size-fits-all minimum wage on every one of the thousands of diverse communities in America, failing to consider their very different costs of living and very different labor markets.

Many progressives might think that low-skilled workers in high-cost communities are cheated, because fewer of them would be affected by a minimum wage increase to $10.10. In reality, it’s the other way around. In a high-cost, high-wage labor market like Manhattan, a $10.10 per hour minimum wage is so low relative to average wages that it won’t have much impact there.

Compared to low-cost, low-wage labor markets, fewer low-skilled workers in Manhattan would be priced out of the labor market at $10.10 per hour and more will have the opportunity to get a job, build some skills and work habits, and move on to something better. After all, evidence shows that two-thirds of minimum wage workers receive a raise within one year, putting them on the road to a better future.

In contrast, 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, and the results could be disastrous.

Employers in Pueblo can’t simply raise prices to help pay for a 40 percent increase in the minimum wage to $10.10 per hour, since their customers don’t have the incomes to cover such a cost. 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, as a recent academic study concludes. Low-skilled workers will be most hurt in low-cost cities like Pueblo by a national minimum wage that isn’t adjusted for local conditions and costs of living.

It’s probably not a coincidence, therefore, that the most vocal supporters of a higher minimum wage come from high-cost, high-wage urban areas, where a higher minimum wage of $10.10 per hour might have only a negligible effect. But it’s the small communities around the country like Pueblo that will suffer the most from an increase in the minimum wage to $10.10 per hour, because that uniform national wage raises the cost of hiring low-skilled workers by a disproportionately greater amount in the labor markets with lower costs of living.

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.

Nothing prevents high-cost cities or states from raising their minimum wage above the federal level. Indeed, liberal enclaves like SeaTac, Washington, and Montgomery County, Maryland, have recently voted to raise their minimum wages well above the federal level. But low-cost areas like South Dakota are prohibited from lowering their state minimum wage below the federal minimum, and those areas will suffer the most from a national minimum wage because they aren’t allowed to adjust the minimum wage to the local cost of living. This means that 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 or above, but to low cost-of-living areas where wages are justifiably lower.

Even proponents of the minimum wage would have to 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, even if low-skilled workers in high-cost, high-wage communities are relatively unaffected.

Moreover, the administration’s current proposal calls for indexing the minimum wage forever, meaning that the adverse effects of a single national minimum wage on low-cost, low-wage communities will be permanent.

Before raising the minimum wage to $10.10 per hour, 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. 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.

Listen to Mark Perry on AEI's Banter podcast, "The Problem with a National Minimum Wage."

FURTHER READING: Read AEI's compilation, "Opportunity for All: How to Think about Income Inequality." Stan Veuger says "Democratic Governors Make a Weak Minimum Wage Case." Ramesh Ponnuru argues "Raising the Minimum Wage Is Still a Bad Idea." Mark J. Perry contributes "Bill Gates at AEI on the Risks of Raising the Minimum Wage." Arnold Kling writes “The Reality of the Real Wage.

Image by Dianna Ingram / Bergman Group

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