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Tuesday, August 9, 2016

What a National $15 Minimum Wage Actually Means in Your State

One-size-fits-all is really one-size-fits-none.

The Tax Foundation released the map above (“The Relative Value of $100) earlier this week in a post titled “The Real Value of $100 in Each State.” Here are some details:

This map (above) shows the real value of $100 in each state. Prices for the same goods are often much cheaper in states like Missouri or Ohio than they are in states like New York or California. As a result, the same amount of cash can buy you comparatively more in a low-price state than in a high-price state.

The Bureau of Economic Analysis has been measuring this phenomenon for two years now; it recently published its data for prices in 2014. Using these data, we have adjusted the value of $100 to show how much it buys you in each state.

The states where $100 is worth the most are Mississippi ($115.34), Arkansas ($114.29), Alabama ($113.90), South Dakota ($113.64), and West Virginia ($112.49). In contrast, $100 is effectively worth the least in the District of Columbia ($84.67), Hawaii ($85.62), New York ($86.43), New Jersey ($87.34), and California ($88.97).

Regional price differences are strikingly large; real purchasing power is 36 percent greater in Mississippi than it is in the District of Columbia. In other words, by this measure, if you have $50,000 in after-tax income in Mississippi, you would have to have after-tax earnings of $68,000 in the District of Columbia just to afford the same overall standard of living. … 

This has substantial implications for public policy, which is often progressive with respect to income. Many policies – like minimum wage, public benefits, and tax brackets – are denominated in dollars. But with different price levels in each state, the amounts aren’t equivalent in purchasing power.

Warren Meyer also made the same point about the minimum wage on the Coyote Blog a few days ago, in a post titled “Another Problem With the National Minimum Wage:

But another issue is that this large variation in cost of living changes the effective value of a minimum wage. Based on these numbers, a $15 minimum wage in Washington DC becomes, effectively, a $20.43 minimum wage in Mississippi.

Employment effects are likely to be much worse in these lower cost states. Since the higher cost states all vote Democrat in Presidential elections, and the lower cost states all vote Republican, one wonders if this is a bug or a feature of Democrat-proposed $15 minimum wage plans.

Real purchasing power is 36% greater in Mississippi than Washington, D.C. The table below displays the value of $100 in each state, ranked from the lowest ($84.67 in DC) to the highest ($115.34 Mississippi). Following Warren Meyer, I calculated the equivalent of a $15 an hour minimum wage in DC for each state, adjusted for cost of living, in the column “Min. Wage I” and the map below.

If You Support a $15 Minimum Where You Live, You Shouldn’t Support It Anywhere Else

Assuming that $15 an hour might be an appropriate minimum wage in a high-wage, high cost of living area like DC (where it will be in effect by 2020), that minimum wage, adjusted for the much lower cost of living in many states, would be the equivalent of wages above $19 an hour in almost half of the US states (19) and above $20 an hour in four states (South Dakota, Alabama, Arkansas, and Mississippi).

A national minimum wage increase would be a disaster for low-cost states.And it’s those differences in cost of living (more than 36 percent, from highest cost DC to the lowest cost Mississippi) that explain why a uniform national minimum wage would be terrible public policy, especially for America’s low-cost communities and states, where a $15 an hour minimum wage would be an economic disaster. And yet the $15 an hour minimum wage hysteria that is sweeping the country has given very little consideration or attention to the disastrous effects on small, low-cost, low-wage parts of the country.

Alternatively, the last column in the table (“Min. Wage II“) shows what the cost of living adjusted minimum wage should be in each state, assuming that a $15 an hour might be appropriate in the highest cost area — DC — and if that minimum wage was adjusted downward in each state to be consistent with lower cost of living.

For example, if $15 an hour was considered to be a minimum wage that might have minimal negative employment effects in the highest-cost areas of the US, like DC, the cost of living adjusted minimum wage for states like South Dakota, Alabama, Arkansas, and Mississippi should be only about $11 an hour. But at $15 an hour, the minimum wage could have huge negative employment effects on communities in those states.

Variation in Cities Matters, Too

For example, a different cost of living calculator shows that a $50,000 annual salary in Washington, DC, would be equivalent to a $25,714 salary in Cleveland, Ohio, which is almost a 50 percent difference. And yet progressives in Cleveland are determined to raise the city’s minimum wage to $15 an hour, with no apparent recognition that the city’s low cost of living and the city’s labor market for low-wage workers can’t possibly support a minimum wage that could be almost equivalent to a $30 an hour compared to Washington, DC!

As my AEI colleague Andrew Biggs and I wrote several years ago in our article “A National Minimum Wage Is a Bad Fit for Low-Cost Communities,” when the push was for “only” a $10.10 an hour minimum wage:

Even proponents of the minimum wage would have to concede that a universally applied minimum wage, without any adjustments for the significant differences in the cost of living across the country, has to have disproportionate effects by location. And proponents have to also agree that a minimum wage of $10.10 per hour will be far too high for low-cost rural areas, and will have adverse effects on low-skilled workers in those communities, even if low-skilled workers in high-cost, high-wage communities are relatively unaffected.

Moreover, the administration’s current proposal calls for indexing the minimum wage forever, meaning that the adverse effects of a single national minimum wage on low-cost, low-wage communities will be permanent.

Before raising the minimum wage to $10.10 per hour, we should carefully consider the long-lasting damage that will be inflicted on thousands of America’s low-wage, low-cost communities from that “one-size-fits-all” national minimum wage.

The huge variation in cost of living around the country is just one more reason, among dozens of others, that a uniform $15 an hour federal minimum wage is terrible public policy. It’s a blunt, one-size-fits-all, national price control that applies uniformly to every community in America, with no adjustments for the significant differences in living costs throughout the US.

“One-size-fits-all” is really “one-size-fits-none.”A “one-size-fits-all” $15 national minimum wage is really a “one-size-fits-none” minimum wage. It will disproportionately and adversely affect low-skilled workers and small businesses in America’s low-cost areas — and those areas are already among the country’s poorest communities. Leave it to the well-meaning progressives to support public policy that will harm the most vulnerable and poorest Americans  once again.

A version of this article first appeared at the Carpe Diem blog at the American Enterprise Institute.

  • Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.