The minimum wage is way too low in most places, but a bit too high in a few
On July 1, millions of workers across the country got a raise. The states of Oregon and Maryland, as well as a number of cities and counties in Illinois, Arizona, and California raised their minimum wages. Yet these new thresholds are vastly different—ranging from $9.25 in the state of Maryland to $15.25 in Emeryville, California, for workers at large companies. In San Francisco, low wage workers will now make a minimum of $14 an hour; in D.C. the rate rose to $12.50; in San Jose and Los Angeles, to $12; and in Chicago, to $11. These new rates in some of America’s most dynamic economies stand in stark contrast to the federal minimum wage, which has stagnated at $7.25 an hour for the past ten years.
The recent flurry of minimum wage increases and the broader “Fight for 15” movement represent a sorely needed course correction of our nation’s treatment of low-wage workers. As cities and states begin to take the lead on this issue, it’s important for them to keep in mind the economic realities that determine an effective wage floor. According to my own analysis and the work of other economists, current minimum wage levels are too low in almost all cities.
But in a few places that are moving toward the $15 mark, my analysis also finds that there may be a such thing as too high. This question was the subject of a recent controversial study of Seattle’s minimum wage. While an initial increase from $9.47 to $11 per hour in 2015 had little effect, the researchers found that a second rise to $13 in 2016 reduced hours worked by low-wage workers by 9 percent. During the same time period, wages only increased by 3 percent, ultimately reducing the wages of low-wage workers by $1,500 a year. The study had its problems, as the New York Times editorial board and Bloomberg pointed out. Namely, it did not include businesses with locations outside of Seattle, many of which are multinational franchises that are almost certainly in a better position to absorb wage increases.
However the study has raised an important point that we need to talk about: Minimum wage increases that are either too high or too abrupt can have adverse economic consequences. As cities continue to take the lead on the minimum wage, they should use empirical data to determine a locally-appropriate threshold.
According to leading labor economists, like Arindrajit Dube of the University of Massachusetts-Amherst, an ideal minimum wage can be set for particular regions rationally and empirically by pegging the local minimum to roughly 50 percent of the local median wage. In an email to me several years ago, he also suggested that a minimum wage set to 60 percent of the local median would form an absolute upper bound, beyond which the minimum wage may start to cause more economic damage than good. Fifty percent of the median wage is roughly where the minimum wage has been set across the advanced OECD nations; and it is also where the US minimum wage hovered during the 1960s and 1970s, hitting a maximum of 55 percent of the national median wage in 1968. In 2013, the national minimum wage of $7.25 stood at just 38 percent of the national median, the third lowest threshold in the OECD.
Using median wage data from the Bureau of Labor Statistics, my team and I identified the 50 and 60 percent thresholds for all of America’s 382 metro areas (see the map above). Since there are various ways to calculate median wages, these data are not perfect. Other indexes, including cost of living, are also important to factor in. However, these numbers do give a rough sense of each metro’s ideal rate. The table below shows the current minimum wages for the ten highest-paying large metros in the country compared to 50 and 60 percent of the metro median wage.
The first thing that jumps out is that a $15 an hour minimum wage may be too high for most metros. In Seattle’s case, that is roughly 65 percent of the current metro median wage. Set at 50 percent of the current median, the metro’s minimum wage would be roughly $11.50; at the 60 percent upper-bound, it would be $13.75. While the city likely has higher living costs and a higher median wage than the metro as a whole, this suggests the current minimum wage is close to its maximum level. In fact, the only metros that seem well-positioned to tolerate a $15 minimum wage are San Jose, Washington D.C., and San Francisco.
For now, however, only three of the top ten large metros with the highest median wages—San Francisco, Seattle, and New York—have minimum wage levels that are more than 50 percent of their median wage. These three cities, as well as San Jose, Washington, and Minneapolis, have plans to gradually increase their minimum wages to $15 in the coming years. As the Seattle study indicates, this transition may not be without growing pains, particularly for smaller businesses in like Minneapolis and Los Angeles
, where the median wage is lower.
Zooming out from the small group of superstars and tech hubs that have approved substantial minimum wage increases in recent years, it’s important to recognize that most of the country, especially city dwellers, live in places where the minimum wage is too low, according to our threshold. Indeed, the current federal minimum wage of $7.25 is too low for more than 85 percent of the nation’s metros (330 of 382 metros), and for each and every one of the nation’s large metros (with populations over one million people), as the table below shows.
The large metros with the lowest median wages have current minimum wages (all of which are based on state and federal standards rather than the citywide rates employed by most high-earning cities) of between $7.25 and $8.10, with the exceptions of Tucson and Grand Rapids. In every case, $7.25 an hour is too low of a rate, even for these lower-wage metros. For this set of metros, 50 percent of the metro median ranges from about $7.50 to $8.50 per hour. And, depending on the particular metro, a minimum set at 60 percent of the metro median would range between $9 or $10 dollars an hour, more than their current minimum wages but significantly less than the rates for the highest-paying metros above.
America badly needs to upgrade its millions upon millions of low-wage service jobs. Surely, a higher minimum wage is a key part of turning these jobs into better, more family supporting work. But, this must be done carefully and in light of local economic reality.
While the grassroots Fight for 15 has yielded many desperately needed wage increases in cities and states across the country, a $15 minimum wage makes sense for only a very few of America’s most expensive and highest-paying superstar cities and tech hubs. There will be much to learn from observing how those cities adapt to a rising minimum wage in the coming years. Hopefully, pioneering cities like Seattle will act as urban laboratories, helping all of us better understand the most effective ways to ensure a family-supporting, living wage for all workers.