Abolish The National Minimum Wage

Arindrajit Dube wrote a paper in 2004 that explains several ways that the minimum wage is flawed.  For example:

  1. The minimum wage isn’t adjusted for inflation.
  2. It isn’t adjusted for local cost of living and labor market conditions.  In some places with high wages and costs (like Aspen, Colorado) it is laughably low.

Dube has a better way.  He proposes to set the local minimum wage at half the local median wage.  That would automatically adjust the minimum wage to the local labor market and help keep it adjusted for inflation.  It would also raise the real value of the minimum wage up to the level where it was in the US in the 1960s and 70s and closer to the international average ratio of minimum-to-median in other OECD nations.

Jared Bernstein created a graph showing the effect of a proposal like this in a few regions of the US:

min wage regions

Dube’s proposal would also standardize an ad-hoc process in the US in which some cities and states independently raise their local minimum wages closer to half of the median wage.  Businesses would be able to prepare for minimum wage hikes better if the process were standardized across the US and more predictable.  When legislatures arbitrarily adjust the minimum wages they cause relatively large, abrupt changes that are harder for businesses to adjust to.  In 1949, the minimum wage almost doubled and even small jumps can be hard to accomodate.  When Ohio raised the state minimum wage in 2008, it pushed Bluffton University’s budget (where I work) into the red because it was an unplanned expense.  Eliminating all the jagged increases on the graph below would be a more efficient system.


Opponents of the minimum wage do not want a more efficient system, because a better system would be more palatable, but they should face up to the reality that the minimum wage is extremely popular among ordinary people in both parties, so neither party will commit political suicide and abolish it.

min wageEconomists were more divided about whether the minimum wage was a good idea 20 years ago, because economists used to think that it hurt the poor by raising unemployment.  But new empirical studies since then have shown about zero unemployment effect, so today five times more economists support raising it than oppose it.

The Republican Party leadership has opposed minimum wage increases for decades, and ironically they would have the most to gain from a proposal like Dube’s because it would eliminate the constant opportunity for their opponents to successfully bash them.  Every time there is a minimum wage increase, they are stuck defending a very unpopular position.  Dube’s proposal would greatly reduce the need to regularly pass laws to adjust the minimum wage for inflation.  That would help the Republican leadership avoid an uncomfortable topic that regularly gives a boost to their opponents.  The issue rarely comes up in countries where it is indexed to inflation.

Dube’s proposal is similar to the way international businesses adjust the wages they pay across the regions of the globe.  For example, Ikea pays different wages in different areas that reflect the local labor market conditions.

Dube’s proposal is also similar to the government’s method for setting the maximum CEO wage it pays to defense contractors and private prison corporations.  Kevin Drum explains:

Apparently the federal government has a cap on the amount it’s willing to reimburse contractors for the salaries of their employees. If…  your company’s CEO makes $3 million per year, you can’t charge it all back to the feds even if 100 percent of the CEO’s time is spent on government contracts. The limit, set in 1998, was $340,000.

[If that amount had risen with inflation], by 2011 it would be around $467,000. But no. It [rose to] $763,000. Why? Because ordinary inflation adjustments are for chumps, that’s why. For purposes of charging CEO overhead to the federal government, the cap was set at “the median amount of the compensation provided for the five most highly compensated employees of all publicly owned U.S. corporations with annual sales in excess of $50 million for the most recent fiscal year.”

This rule means that taxpayers have increased what we pay to government contractors much faster than other prices.  The median wage and even the President of the US’s wage has not risen nearly as fast.  It is rising fast because, as Lydia DePillis notes, the median salary of CEOs at America’s 3,000 largest companies has risen precipitously.  By now, CEOs are billing taxpayers about double the salary of the highest paid federal government worker (the president at $400,000).  DePillis argues that the government should worry more about raising the wages of the poorest people working for its contractors rather than the richest. She criticizes the Obama administration for not doing anything about the way its privatized corporate welfare results in lower pay for ordinary workers and higher pay for elites:

Right now, the federal government indirectly [by hiring private contractors to do government work] employs some 2 million people  who make less than $24,000 per year, or under $12 an hour. The administration could, by executive order, require that all of them be paid at least that.

Instead, Obama raised the rate to $10.10 in January 2015.  Again, Dube’s proposal is more sensible.  Just set the minimum wage for federal contractors at half the local median wage.  Since it is a political reality, we should make work better.

UPDATE: I came across a CEPR history of minimum wage research which may help explain why the real value of the minimum wage dropped during the 1980s and stayed low since then (see the decline in the above graph in light purple).  In the early 1980s a lot of early published research did find that the minimum wage increased unemployment.  However, subsequent research using larger samples and more sophisticated techniques has reversed a lot of the early findings.  But the research probably influenced policies at the time.  That is the power of ideas.

Posted in Inequality, Labor, Medianism

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