Calls to raise the federal minimum wage from activist groups such as “Fight for $15” could actually do more harm than good to working Americans. The U.S. economy is comprised of several state and local economies that each vary in price level and equilibrium wage. Therefore, the federal minimum wage should be set at a level appropriate for every state and local economy in the U.S.—which is quite lower than $15. By contrast, state and local leaders should take a more responsible policy approach to align their minimum wage with its corresponding price level and cost of living. Finally, to preserve real value, federal, state, and local minimum wage rates should be indexed to inflation annually.
The equilibrium wage sheds light on the negative consequences of a disproportionate minimum wage hike. The equilibrium wage is the wage rate where demand for labor equals the supply of labor. In other words, when the minimum wage rises above the equilibrium wage, demand for labor drops, especially for small businesses as employers can no longer afford to hire as many workers. Unemployment then rises. For example, even in wealthier economies such as Seattle, which has already begun phasing in the $15 minimum wage, small business are feeling the pressure. According to Forbes, in the months following the first minimum wage hike, “Seattle had the largest three-month loss of jobs in city history.” The effects of such a steep increase in the minimum wage have proven to greatly hinder the job growth of Seattle’s lowest paid workers, shedding more than 700 restaurant jobs as reported by the Daily Signal. This shows that a $15 minimum wage is incompatible in even the nation’s most affluent cities, highlighting the negative effects of setting the minimum wage above the equilibrium level. The effect of such an increase on a poorer locale can be even more damaging.
When the federal minimum wage was first raised to $7.25 in 2009, an increase of $2.10, it caused an economic meltdown in the U.S. territory of Puerto Rico. According to the Wall Street Journal, raising the minimum wage in Puerto Rico equaled “77 percent of per capita income, compared with 28 percent in the U.S. overall.” The increase sounds nice, but according to the U.S. Bureau of Labor Statistics, it actually deepened unemployment from 10.6 percent to 16.9 percent in the following months. Though unemployment has dramatically decreased in subsequent years, Puerto Rico still faces unemployment rates above 12 percent. Considering the current federal minimum wage of $7.25 was only a bump of $2.10, a $15 minimum wage—a jump of $7.75—could be even more disastrous than Puerto Rico’s. This wage hike would equal “65 percent of 2014 U.S. annual per capita income” according to Charles Lane of The Washington Post and would affect the entire U.S. Poorer regions, where the equilibrium wage is lowest, would be most affected.
All of this is not to say that all minimum wage hikes are bad. On the contrary, due to inflation the past six years, the current federal minimum wage has decreased 9.9 percent in real terms. According to the U.S. Bureau of Labor Statistics, the current $7.25 minimum wage would be valued at only $6.53 in 2009 dollars. This underscores the urgency in maintaining a fair, inflation-adjusted minimum wage to counteract the significant loss of its purchasing power. An inflation-adjusted federal minimum wage rate of $8.05 in 2016 dollars, or $7.25 in 2009 dollars, could be an appropriate wage rate for the U.S., provided that the rate continues to be adjusted for inflation. This wage rate would ensure a rate of pay that is fair for both workers and businesses, especially in the nation’s poorest states and municipalities. State and local leaders should be more proactive in setting minimum wage rates commensurate with local price level and labor demand.
Richard Pierre is from Washington, D.C. and is Phi Beta Kappa in Economics at the University of Arizona. He can be reached at email@example.com.
Image: Wikimedia Commons/Fight for $15