Increasing the Federal Minimum Wage: Should Decreasing Inequality be National or Regional?

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History tells us that the fundamental law of economics is that owners of land and other capital have immense power over workers.  Unless some mechanism created by society intervenes, capitalism will drive wages for workers down to a subsistence level.  Society has fought back in two ways.  The first is to provide a means for workers to unify and bargain with capital for higher wage levels.  In some countries, and at some times, this process has worked.  However, for countries without national unions covering essentially all workers, the best and only way to provide a wage floor that keeps workers out of poverty is by establishing a national minimum wage.  In many cases this wage is indexed to be some fraction of the national median wage. 

The United States established a minimum wage beginning in 1938.  It has been increased occasionally as inflation has eroded its value, but since the 1960s, it has not kept up with inflation.  An article by David Cooper for the Economic Policy Institute (EPI), Raising the federal minimum wage to $15 by 2024 would lift pay for nearly 40 million workers, provides background on the topic.

“Yet since the late 1960s, lawmakers have let the value of the minimum wage erode, allowing inflation to gradually reduce the buying power of a minimum wage income. When the minimum wage has been raised, the increases have been too small to counter the decline in value that has occurred since 1968, when the minimum wage hit its peak in inflation-adjusted terms. In 2018, the federal minimum wage of $7.25 was worth 14.8 percent less than when it was last raised in 2009, after adjusting for inflation, and 28.6 percent below its peak value in 1968, when the minimum wage was the equivalent of $10.15 in 2018 dollars.”

A bill has been proposed that would gradually raise the national minimum wage to $15 in 2024.  Thereafter its value would be indexed to the national median wage.

“On January 16, 2019, Sen. Bernie Sanders (I-Vt.) and Rep. Bobby Scott (D-Va.) announced that they would introduce the Raise the Wage Act of 2019, a bill that would raise the federal minimum wage in six steps to $15 per hour by 2024. Beginning in 2025, the minimum wage would be “indexed” to median wages so that each year, the minimum wage would automatically be adjusted based on growth in the median wage. The bill would also gradually increase the subminimum wage for tipped workers (or “tipped minimum wage”), which has been fixed at $2.13 per hour since 1991, until it reaches parity with the regular minimum wage.”

Raising the minimum wage will affect more than just the workers currently earning less than the new value.  There will be a ripple effect as workers just above the new minimum will demand higher wages to avoid the poor optics of earning little more than the minimum wage.

One of the issues that had to be considered in formulating this proposed legislation is whether the climb to a level of $15 made sense for states in which prevailing wages were much lower than national averages.  EPI concluded that regional variations were inappropriate, and a firm national minimum was the correct approach.  Its reasoning can be found in The federal minimum wage should be a robust national wage floor, not adjusted region by region.  This is the EPI logic.

“Regional minimum wages bake in low wages to already low-wage places. Rural counties and Southern cities—where wages have been depressed for a variety of social, racial, political, and economic reasons—would effectively have their low-wage status locked in by a regionally adjusted federal minimum wage. For example, in many low-wage areas, the predominant employers of low-wage workers are big national businesses, such as Walmart and McDonald’s, who can afford to pay far better wages than they do. Their position as the predominant employer in many rural or small-town areas gives them monopsony power and allows them to essentially set wages not just for themselves, but for all low-wage jobs in the region.”

The low-wage southern states have long played a role analogous to that of China in using a cheap labor supply, lax environmental regulations, and anti-union actions to lure companies and jobs from higher-wage regions within the United States.  This would be a good thing if economic benefits from such transfers had led to equilibration of wages and policies between the various regions.  Instead, southern politicians have strived successfully to maintain the South as a permanent low-wage, anti-regulation region.  This situation is not healthy for the nation and it is not healthy for southerners.  Gradually forcing southern and rural low-wage regions to change via a national minimum wage is one way to address this issue.