How to Make a Smarter Minimum Wage

Former White House economist Jared Bernstein suggests the minimum wage should depend on an area's cost of living.

Let's say, hypothetically, that the national minimum wage were raised from its current $7.25 an hour to the Obama administration's proposed $10.10. How would that affect minimum-wage workers across the country?

A lot of the answer to that depends on exactly where in the country those workers live. $10.10 is going to go a lot further in small cities or rural areas than in big urban centers like New York or Chicago.

Here's how former White House economist Jared Bernstein puts it in an essay in today's New York Times:

 When we adjust a national minimum wage of $10.10 for regional differences, these are the amounts you’d need to have the same buying power: $11.94 in Washington, D.C., and $11.40 in California, but only $8.90 in Alabama and $9.08 in Kansas.And of course, prices vary within states as well. In the New York City area, it would take $12.34 to meet the national buying power of $10.10; upstate around Buffalo, you’d need only $9.47. In the Los Angeles area, it would take $11.94; go up north a bit to Bakersfield, where prices are closer to the national average, and it’s $9.83.

What if minimum wage rates could somehow be tied to specific locations?

That's the idea behind a recent paper by Arindrajit Dube at the University of Massachusetts, Amherst, which inspired Bernstein's essay.

"State and local governments can set minimum wages in excess of the statutory federal minimum wage," Dube writes. And many do: 22 states and a handful of cities have all set their minimum wages above $7.25. But how do they know they are picking fair, helpful rates? What should guide states and municipalities as they try to target their wage rates to their specific populations?

Dube outlines two ways: Either set the minimum wage at half of a state's median wage, or begin with a wage that is half the national median and then customize it based on the costs of a particular region (as measured by the the Bureau of Economic Analysis’ regional price parities—RPPs). Between the two, Bernstein prefers the latter, since a state's median wage washes out the variations that occur within that state.

"Ikea had this very notion in mind when it announced that it would raise the minimum wage of its employees," Bernstein writes. "The hourly wage for each store will be based on the cost of living in that particular area, ranging from $8.69 to $13.22."

Bernstein adds that Dube's proposal doesn't just make economic sense but it has political merit too. "Economists endlessly and fruitlessly argue about whether the impact of minimum wages on jobs is very small or zero," he writes. "Policy makers who most resist minimum wage increases tend to be ones representing the interests of states with lower prices and wages. To their credit, many states and even some cities are ignoring this unhelpful debate and taking action to raise the pay of their low-wage work force, push back a bit on inequality, and work around Washington’s dysfunction. If adjustments for local wages and prices makes this go down easier, so much the better."