The voices of Urban Institute's researchers and staff
February 24, 2017

The federal government’s role in minimum wage policy may be to take a backseat

February 23, 2017

Former labor secretary nominee Andrew Puzder’s resistance to raising the federal minimum wage drew the ire of policymakers and advocacy groups, but when evaluating Alexander Acosta, the new nominee, stakeholders should consider whether an increased federal minimum wage should be a priority.

Acosta has yet to reveal his stance on the minimum wage, although undoubtedly many of Puzder’s critics hope Acosta will be more amenable to a higher federal minimum. But an important element of minimum wage policy is frequently left out of the debate: wage rates vary tremendously across the country.

Highly variable local wages mean that the ideal minimum wage—the minimum that benefits workers without causing large employment reductions—will vary by city and state. Considering local wage levels is important because a state minimum wage rate that is higher than the current federal minimum wage of $7.25 (such as in Washington, DC, or Maryland) may actually be low relative to the level of wages in that state. Likewise, the minimum wage in a state that uses the federal minimum (like Virginia) may be more substantial in the context of the state’s labor market.

The ratio of a state’s minimum wage rate to median wages in that state is a common measure of how high a minimum wage is in light of state labor market conditions. A higher ratio indicates that the minimum wage in that state is relatively high—that is, relative to local wages.

In policy debates, we often assume that the federal minimum wage rate is a floor that the federal government enforces to protect vulnerable workers in states that neglect workers’ interests. A different picture emerges when we explore how the minimum wage compares with median wages across states. States where the federal minimum wage prevails do not have noticeably lower ratios than states that exceed the federal minimum wage.

States ranked by ratio of minimum wage to median wage in that state, 2015

In the most extreme case, Washington, DC, which does not use the federal minimum wage, has the lowest ratio (33.1 percent) between its minimum wage and median wages. On the other end of the spectrum, Puerto Rico uses the federal minimum wage, which is higher relative to the local median wage than the minimum wage in any other state (Puerto Rico's ratio is 75.4 percent). Because the minimum wage is relatively low in Washington, DC, it does not pose as great a burden on local employers as the relatively high minimum in Puerto Rico, which means that the risk of job loss is lower in Washington, DC, than it is in Puerto Rico.

The trade-off policymakers must consider is that because the minimum wage is relatively low in Washington, DC, it will purchase less in that relatively expensive city, while the minimum wage will purchase more in relatively inexpensive Puerto Rico.

Exploring minimum wage ratios can clarify which states have comparable relative minimum wages. California and Washington State have famously raised their minimum wage in recent years, but after taking local labor market conditions into account, those states’ minimum wage is about as high in relative terms as the minimum wage in Louisiana or Idaho.

The difference between Washington, DC; California; and Washington State on one hand and Puerto Rico, Louisiana, and Idaho on the other is that residents of the former studied their local labor markets and deliberated about how high they wanted their minimum wage rate to be. Residents of California and Washington State wanted their minimum wages to be higher relative to local wage levels than residents of Washington, DC, did, for example. In Puerto Rico, Louisiana, and Idaho, residents couldn’t choose what residents of Washington, DC, chose; federal law prevented them from setting a local minimum wage that was low relative to their local wage level.

The wide variation of local labor market conditions across states and cities suggests that policymakers may want to consider relying less on aggressively increasing the federal minimum wage and focus more on minimum wages passed by states and cities. The empirical evidence suggests that workers benefit from the minimum wage, but that minimum does not have to be set by the federal government, and states and cities can set their own wage floors at levels they deem appropriate. 

Striking McDonald's restaurant employees lock arms in an intersection before being arrested, after walking off the job to demand to demand a $15 per hour wage and union rights during nationwide 'Fight for $15 Day of Disruption' protests on November 29, 2016 in Los Angeles, California. Photo by David McNew/Getty Images.

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