The Federal Minimum wage is one of the more partisan policies of our time. Although raising the minimum wage is wildly popular, it has sat at $7.25 since July 2009. This article will examine why the United States should raise the minimum wage and then proposes a creative implementation of the wage increase. In the process, we reveal that the battle over the minimum wage is far more political than economic, offering further encouragement for a much-needed boost to the United States’ wage floor.
The minimum wage disproportionately affects those living closer to and around the poverty level. By raising the minimum wage – which raises the effective wage many of the United States’ poorest earn – poverty and inequality will be reduced. The higher wages found in low-skill jobs may also incentivize less reliance on government assistance as employment looks more attractive.
A study performed on the effects of Seattle’s $15 minimum wage found that the hike hasn’t raised prices as expected. Economists are also converging on the thought that minimum wage increases don’t destroy low-paying jobs, as evident in this letter to former President Obama. These findings are significant because the efficacy of any jobs policy depends on the real wage and employment; in both cases, the empirics suggest that raising the minimum wage won’t negatively impact these two metrics.
It’s our belief that the United States’ great policy stagnation, especially in the minimum wage arena, is a byproduct of a lack of innovative policy. Instead of suggesting an across-the-board increase of the minimum wage, we offer a few fresh suggestions. In effort to ensure that the benefits associated with a wage increase flow to the intended beneficiaries, we suggest that the following policy changes only apply to individuals who are financially independent (as defined by not having a taxpayer claim the individual as an dependent). This ensures that those truly supporting themselves and their family on a minimum wage salary experience the wage increase, as opposed to a 17 year old working a summer job.
With the goal of creating a minimum wage that approaches a living wage, yet minimizes any “wage surpluses” any individual employees may receive, we suggest an approach that determines the minimum wage at the individual level. Each worker has a wage floor determined by the following formula:
The living wage determination for each locale could be taken from a government-sponsored calculator modeled like one of the many online. This method of determining the minimum wage will lead to wages better aligned with employees’ individual situations, solving for some of issues opponents of an overall federal minimum wage increase raise.
The reasoning behind the weighted average calculation of a new minimum wage is to manage incentives. If the calculation is only based on the locality in which an individual works, businesses are incentivized to move their stores, factories, and offices out of cities (where the cost of living, and therefore wages, are higher). This policy would be doomed because of the opposition it would face from city officials with interests in preserving their central business districts and keeping certain companies within their community. On the flip side, if the calculation only includes the locality in which an individual works, employees are incentivized to move their residence to a place with a higher cost of living. This determination of the minimum wage would face opposition from construction companies and town officials interested in developing their more rural locale.
The initial apprehensions presented would definitely make headlines, however, we are doubtful that these concerns would ever materialize. We hypothesize that individuals experience a degree of “stickiness” in determining their residence; households experience intangible value in the community they’ve built near their residence, the schools their children attend, etc. In our eyes, these connections reduce the likelihood of households moving to chase a marginally higher wage. Households must also account for the fact that much of the higher wages are offset by a higher cost of living. Therefore, the optimal positioning for a household is to live in the “country” where the cost of living is low, but work in the “city” where living wages are higher. In this outcome, an employee wages experience leakage due to transportation costs, further reducing this effect.
On the opposite side of the equation, how would businesses react with the option to lower their labor costs by moving to a municipality with a lower cost of living? We believe that many of the minimum wage jobs are also already in areas with lower costs of living, reducing the impact the policy would have. Some could also argue that the implementation of this policy could lead employers to discriminate against more affluent zip codes. However, the distribution of different skillsets and suitability for jobs by neighborhood may limit employers’ ability to exploit this potential inefficiency.
Although this particular outcome may not be the solution our Nation needs, our hope is that this article will, at the very least, open up politicians and economists’ minds to thinking about the minimum wage issue in a more nuanced manner.