The Downsides of a One-Size-Fits-All Minimum Wage

by Reihan Salam

You might have heard that Connecticut recently raised its minimum wage, which is now scheduled to reach $10.10 in 2017. This happens to be the exact same minimum wage the Obama administration has proposed for the United States in 2016, so Connecticut’s proposal isn’t quite as bold as it seems. If President Obama succeeds in passing his federal minimum wage increase, Connecticut’s new increase will be moot. But it is also worth noting that Connecticut has one of the highest median household incomes ($69,519) in the United States ($53,046). By way of comparison, Connecticut’s median household income is 78.8 percent higher than that of Mississippi ($38,882).    

As we’ve discussed, one of the most problematic aspects of the effort to raise the national minimum wage is that the median hourly wage varies considerably across different U.S. communities, a policy that might work in Connecticut might not work for Mississippi. If we decided to set the minimum wage at 50 percent of the median hourly wage in a given region, we’d see local minimums ranging from $15.72 in high-productivity metros like Silicon Valley to $8.93 in low-productivity metros like the Orlando area. Will the impact of a $10.10 federal minimum wage be identical in both regions? I doubt it. 

In a related vein, Andrew Biggs and Mark Perry warn that imposing a uniform minimum wage across the United States will hurt poor regions more than rich regions. They offer the case of Pueblo, Colorado, a low-cost, low-wage labor market. If employers in Pueblo were subject to a much higher federal minimum wage, they wouldn’t simply be able to raise prices, as their customers wouldn’t be in a position to pay higher prices, unlike customers in more affluent regions. The result is that employers in Pueblo and cities and towns like it would have little choice but to economize on labor costs by substituting capital for labor, demanding more intense work effort from existing employees, and cutting back on hiring.

One wonders what will happen to the would-be workers priced out of the labor market as a result. They won’t be able to find work in the formal sector in high-cost, high-wage labor markets. Instead, these women and men will be forced to languish on the sidelines, dependent on some combination of public assistance and private charity. That or we will see a robust increase in the size of the underground economy, as we’ve seen in other countries with onerous labor market regulations. What might this do to trust in government, or to our ability to protect vulnerable workers? 


The Agenda

NRO’s domestic-policy blog, by Reihan Salam.