The Case for a Minimum Wage Formula

The case for the minimum wage is straightforward. The evidence shows that, at least at some level, minimum wages increase the incomes of low-wage workers without actually causing much, if any, disemployment. From that straightforward case, the natural question arises: what should the minimum wage be?

It's obvious that the question cannot be answered in some universalist sense. This is because richer economies with higher levels of productivity can comfortably sustain higher minimum wages than poorer economies with lower levels of productivity. Thus, the appropriate minimum wage for the US is not the same as the appropriate minimum wage for India. The appropriate minimum wage for 2015 US is not the same as the appropriate minimum wage for 1915 US. And, as Arin Dube notes, the appropriate minimum wage for Mississippi is not the same as the appropiate minimum wage for Massachusetts.

One way to respond to the need for regional differences in the minimum wage is to just allow cities and states to set it. Alternatively, you could set a federal minimum wage that was fairly low and allow cities and states to top it off. Indeed, this is the approach the US has currently taken. The problem with both of these approaches is that many regions in the country are governed by right-wing forces who set the minimum wage below its ideal level.

The solution to this conundrum—needing regional wage-setting but not having a good enough regional governance to do it—is to set the minimum wage federally, but do it in such a way that it varies from place to place. That is, replace the federal minimum wage level with a federal minimum wage formula. This would involve cutting the country up into various minimum-wage zones (perhaps based on metropolitan areas) and then running each zone's relevant economic indicators (such as median wages and cost of living) through a formula to determine what the minimum wage in that zone will be. The administration of this process could be handled by a federal agency such as the Department of Labor.

As to what the formula should be, Arin Dube tends to suggest setting it at 50% of the median wage of each minimum-wage zone. This is the average for OECD countries, though a number of counties set it higher, such as in France, where it is 61% of the median wage.

I am far from an expert in the matter of minimum wages, but this basic approach to it (again coming from Dube) appeals to me for a few reasons. First, it cleanly solves the regional wage-setting conundrum while bypassing subnational governments entirely. Any time you can bypass subnational governments, you should do it.

Second, and more importantly, the formula approach could conceivably kill the minimum wage issue forever. Sure, there would have to be slight adjustments from time to time, e.g. to the boundaries of the minimum wage zones. But the nature of a formula-based approach is that it is able to update minimum wages automatically in line with changing economic circumstances. As median wages rise, minimum wages rise with them.

The main reason I like the automatic adjustment approach is, frankly, because I think liberal politicians should be pressed to run on more than the minimum wage every year. Under the current regime, inflation eats away at the minimum wage each year. As a result, liberal politicians can basically always run for office as egalitarian champions merely by advocating for nominal minimum wage increases that largely just put the wage back up to where it was a few years ago in real terms.

Some seem to think that indexation of the minimum wage could also kill the minimum wage issue, but this clearly isn't true. Indexation would ensure the minimum wage does not decline in real terms year to year, but it would not ensure the minimum wage grew in line with the overall productivity of the economy. So indexation does not take the issue off the table entirely. Every so often, liberal politicians would still be able to run on increasing it.

The sooner we can neuter this issue, the sooner liberal politicians might be forced to come up with other egalitarian agenda items to focus on. This might mean we see actually serious efforts to progress in the realm of social benefits, taxes, and wealth inequality. At the very least, a permanent fix to the minimum wage would leave increase-the-minimum-wage-sized holes in every liberal politician's platform that would need to be filled with something. And it would be interesting to see what that something is.