In his State of Union address last night, President Obama highlighted a new executive order to raise the minimum wage for workers on new federal government contracts to $10.10 an hour. It's designed to lift the wages of as many as several hundred thousand workers employed on federal contracts as janitors, construction workers, and other low-wage positions.
On a broader scale, Democrats hope this is a first step in their efforts to bring higher wages to all American workers, bringing the minimum wage to the level it would be had it kept pace with inflation since 1968. But beyond indexing the minimum wage to inflation, it may be even more important to index it geographically, by city, to reflect the substantial differences in what workers around the country pay for housing and other basic living costs.
A full roll out of this higher minimum wage would have benefits that reach beyond just the 3.5 million workers who currently make at or below the federal minimum of $7.25. Earlier this month, Emily Badger wrote on Cities about new research from economist Arindrajit Dube, which shows how this type of wage increase would ripple through the low-wage sector, raising income for those in the 10th and 20th percentile as well.
A new analysis from the Center for Economic Policy Research provides crucial, localized evidence for the relationship, on a metro-by-metro basis, between the operative minimum wage and the overall earnings levels for workers at the bottom end of the pay scale. Using data from the Bureau of Labor Statistics' 2012 Occupational Employment Statistics, Jeffrey Gianattasio of the CEPR charted what workers at the 10th percentile of the wage distribution make (that is, those who make less than 90 percent of workers in their metro area but more than 10 percent of workers) and compared that to the prevailing minimum wage for the area. The analysis shows the wide variation in wages to the lowest paid groups of workers across the country and also how the minimum wage can help set a wage floor that boosts pay not only for the workers at the bottom of the wage scale but also for workers throughout the bottom ten percent.
Across the country’s largest metropolitan areas, he found that 10th percentile workers earned about $1 more per hour than the minimum wage. This was true in both high-cost, high-wage metros like Washington D.C. (where the minimum wage was $8.25, and workers in the 10th percentile of wages made $9.42) and lower-cost, lower-paid metros like Houston (where the minimum is the federal $7.25, and wages for the 10th percentile were $8.43).
The first graph (to the right) plots the wages of low-paid workers in the 20 American metro areas with the most workers. There is a strong, positive relationship between local minimum wage (on the horizontal axis) and the wages that workers in the 10th percentile earned.
Gianattasio cautions that this graph shows correlation rather than causation, but the pattern is striking nonetheless. He explains:
“We do not find a clustering of the wage distribution at or slightly above the local minimum wage, even in metro areas with relatively high minimum wage levels, such as the DC and Seattle metro areas. This gives anecdotal support for the hypothesis that the minimum wage exerts some degree of upward pressure on local wages, instead of merely serving as a hard floor on the price of labor.”
The graph below zooms in on just the top end of the spectrum, showing the metros across the U.S. where workers in the 10th percentile earn the most. The light blue bar indicates the wages that workers in the 10th percentile earn, while the darker blue overlay shows the prevailing minimum wage for the area.
The range is considerable even at the top, from more than $10 an hour in Fairbanks, San Francisco, Seattle, and Boston to around $9.50 an hour in Hartford, Bridgeport, and Portland. In nearly every case, the wage for workers at the 10th percentile is substantially more than the prevailing minimum wage. (Santa Fe’s municipal minimum wage increased during the study period, which is why workers in the 10th percentile there earned less than the current minimum). Significantly, Trenton, New Jersey, is the only metro within the top 20 where the minimum wage is the federally mandated $7.25. In all other cases, according to Gianattasio’s analysis, a higher local minimum wage could be part of what is pushing up the bottom end of the pay scale.
Gianattasio also found that seven of the 20 metros where workers in the 10th percentile earn the most are in the state of Washington, which had a nationwide high minimum wage of $9.04 at the time the BLS data was collected. In expensive Seattle, this may have helped drive wages up for the rest of the lowest-paid workforce. In places with lower costs of living like Spokane, the differential between the minimum wage and what the 10th percentile worker earned was far less.
The next graph looks at the 20 metros at the opposite end of the spectrum, the places where workers in the 10th percentile earn the least. All are in the South or Midwest, and eight are in Texas. In all of these places, workers in the bottom ten percent earn at most around $8 dollars an hour. Each one of these metros uses the current federal minimum wage of $7.25. And these are the places where raising the federal minimum wage to $10.10 will help workers the most.
This new CEPR analysis also helps make the case for city-by-city minimum wages, something I have written about here previously. Some 20 states and D.C. already have minimum wages above the federal level, and many municipalities have taken and are taking steps to increase minimum wages above the federally mandated standard as well. Much of the variation in the plots above may partially reflect the tremendous variation in housing and other costs of living between, say, New York City and San Francisco on one hand and Wichita Falls and Laredo on the other. As these graphs also show, a new minimum wage of $10.10 an hour would do much to raise the wages and living standards in the metros where the bottom ten percent currently earn the least. But in high-cost metros, wages for the many in the bottom ten percent are already above the potential new minimum.
The city of San Francisco currently offers one of the highest minimum wages of any major city in the country – at $10.74 an hour. But San Francisco would need a minimum wage of $13.95 to get the lowest-paid workers to just 50 percent of the median wage levels for the metro area. In contrast, this kind of locally adjusted minimum wage would require just $9.45 an hour in Las Vegas and $8.96 an hour in Orlando. Minimum wages of more than $15 per hour – 50 percent more than the projected federal standard – would be required to let the lowest paid workers earn just half of what the median worker currently earns in San Jose and greater Washington, D.C.
Obama’s move to improve the wages of federal contract workers is at least a step toward addressing the sagging bottom of America’s economic order. Indexing the minimum wage to inflation is the least we can do to help ensure that the lowest paid Americans can make ends meet. But it’s high time we deal with the tremendous differences in what it takes for workers to get by in different parts of the country, establishing not a single overall minimum wage but localized minimums which vary in light of the geographic differences in living costs from city to city.
All graphs courtesy Jeffrey Gianattasio. Top Image: Demonstrators gather during a nationwide strike and protest at fast food restaurants to raise the minimum hourly wage to $15 in New York, December 5, 2013 (Reuters/Shannon Stapleton).