Democrats are having a big fight among themselves about how to raise the federal minimum wage, which has been stuck at $7.25 per hour since 2009. Sen. Bernie Sanders (I., Vt.) and some other liberals want it raised to $15 per hour, but conservative Democrats like Sen. Joe Manchin (D., W.V.) say that’s too high for rural areas and smaller cities. They might raise it to $11, which the Sanders camp considers dismissively low.
Why not have it both ways? A 2019 Democratic proposal would establish five minimum-wage tiers for different areas of the country, based on regional living costs. Within five years, the minimum wage in the costliest cities would rise to around $15, which is Sanders’ goal. In medium-cost areas, it would rise to about $13, while in the lowest-cost places the minimum would hit $11.50.
“The reason to do it regionally is anything that’s one-size-fits-all nationally doesn’t fit all these regional labor markets,” says Douglas Holtz-Eakin, president of the center-right think tank, American Action Forum. “I might start by going to northwest Arkansas and figuring out what doesn’t blow up the labor market there. I’d err on the side of those people.”
The problem with a $15 minimum wage everywhere is that it might be fine in big coastal cities like New York and San Francisco, but it would heavily burden employers in the south and Midwest and rural areas that could barely stand to pay that much. As wages go up, employers have stronger incentives to cut back on workers and invest in labor-saving technology. A January Congressional Budget Office analysis found that a nationwide $15 minimum wage would lift 900,000 people out of poverty, while also killing 1.4 million jobs.
Those lost jobs would be most acute in rural areas where people already feel neglected by Washington. “To the extent you’re going to have potentially negative employment effects, you’re really hurting rural areas,” says Clete Coughlin, emeritus economist at the St. Louis Federal Reserve Bank. “It makes sense to do tiers.”
Regional costs vary widely
A tiered system with regional variations might appease politicians like Manchin who represent low-cost-of-living parts of the country. Government data, for instance, shows that living costs in San Francisco, the most expensive U.S. city, are 57% higher than in Beckley, W.V., the lowest-cost metro area. The biggest difference in regional costs is typically housing, which costs more than four times as much in San Francisco as in Beckley. Economically, it doesn’t make sense for businesses in each place to pay the same minimum wage. San Francisco, in fact, wouldn’t even be affected by a $15 federal minimum because it already has a minimum wage of $16.07.
The data already exists to set different minimum wage tiers, and the federal government itself uses such a system for 1.5 million federal workers. The Office of Personnel Management has detailed “locality pay” tables for federal employees in 44 U.S. cities and two states, Alaska and Hawaii. A mid-level, mid-career government worker earns $30.36 per hour in New York City, $28.80 in Denver and $26.34 in Birmingham, Ala. Workers not living in one of those 44 cities earn “rest of U.S.” pay, which is $26.27 for that same mid-level worker.
The Bureau of Economic Analysis calculates “regional price parities” for all 50 states and 386 metro areas, which would form the baseline of a tiered minimum wage system. Dividing those 386 cities into five tranches, or 10, or any number, would determine the appropriate minimum wage in any part of the country. In addition to the obvious big coastal cities, top-wage areas in a five-tear system would include places such as Ann Arbor, Phoenix and Salt Lake City. Middle-wage cities would include places such as Pittsburgh, Iowa City and Omaha. In the lowest tier with Beckley would be cities such as Kokomo, Ind., Bowling Green, Ky. and Monroe, La.
What’s the problem with regionally different minimum wage? Why hasn’t it happened? One quibble is with a lag in the regional price parity data, which runs a year or two behind real-time metrics such as the unemployment or inflation rates. But legislation could include some formula that compensates for that, if it’s even necessary.
Political factors are probably the real reason we lack a more rational minimum wage structure. Some Republicans oppose any increase in the minimum wage, because they don’t want to give Democrats a win or impose an additional cost burden on businesses that help fund their campaigns. Democrats have their own conflicts. While some Democratic centrists—perhaps including President Biden—might go for a regionalized system with a lower wage in some areas, liberal Democrats and some labor groups supporting them say any minimum below $15 would lock workers into paychecks that still don’t support basic living costs.
The result of such absolutism is there may be no hike in the minimum wage at all, even though Democrats have narrow majorities in both houses of Congress. The Senate parliamentarian recently concluded that Democrats can’t pass minimum-wage legislation under the “reconciliation” process allowing a simple majority vote. So a minimum-wage bill would need all 50 Democrats plus at least 10 Republicans supporting it.
If Democrats hold the line at $15, they won’t even get every member of their own party on board in the Senate. A tiered system that essentially provided exceptions in the rural states represented by many Republicans might get some GOP votes. Manchin has said that while he won’t vote for a $15 minimum wage, he might support $11. A tiered system could provide exactly that in his state and others like it, while giving a bigger boost to workers where living costs are higher.
No Democrats, however, have yet proposed a tiered minimum wage as a solution to the current standoff. Sanders’ office didn’t respond to questions about whether he might support a tiered minimum if the “fight for $15” fails, as seems inevitable. Biden supports a $15 minimum, but he has also acknowledged Congress probably can’t deliver it. Many workers would probably prefer a smaller increase over nothing at all.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.