Minimum Wages VS. Median Wages Across States

A few months ago, I wrote a post talking about how the minimum wage is better suited for state and local level policies due to the varying costs of living from across the U.S.

In the following post, I want to elaborate further on these regional differences. However, rather than looking at cost-of-living differences, I want to focus on another factor that varies heavily state to state: median wages. These two factors tie together since a higher cost of living will generally push employers to pay workers more. However, focusing on the median wage itself allows for a simpler barometer of these differences.

The Important Threshold

I began looking at median wage differences after reading a Wall Street Journal article about the increases to minimum wages around the globe. This article focuses heavily on how numerous countries’ wage floors compare to a widely accepted 60% threshold. By this, I mean a minimum wage that is 60% of the overall median wage. A wide range of research indicates that above this line, the negative affects of reduced employment and hours outweigh the positive impact of the higher wages among low skilled workers.

Below this 60% line, though, the benefits mostly outweigh the costs. Research on increases in the US since 1979 that varied between 37% and 59% of the median supports this notion.

The graph below compares unemployment to minimum wages as a percent of the median wages in different countries. A value of 0.6 on the x-axis indicates a minimum wage at this 60% threshold.

Retrieved from The Wall Street Journal

Notice that the three countries above the the 60% threshold (France, Chile, Columbia) have the highest unemployment rates. Countries with a wage floor below 50% of the median (US, Germany, Japan) have the lowest unemployment rates in this chart. On a global scale, this supports the notion that a minimum wage that is too high relative to the median wage will in fact harm employment numbers.

Bringing It Home

I am not here to focus on other countries though, so lets take this idea to the state to state level. Although the US as a whole has a minimum wage that is about 35% of the national median wage, the combination of state level wage floors and varying wages state to state mean that this is not a universal statistic.

Currently, most states do not have a minimum wage that is above 60% of the state level median wage. Those that do, like Maine, are just barely over the line (their wage floor is 61% of their median wage). However, numerous states have enacted legislation that is raising the minimum wage up to such levels as $15/hr over the course of the next few years. These states include Massachusetts, Illinois, and California, among others.

Looking at the motherland, Massachusetts is currently at $12/hr minimum, which is 51% of our current median wage of $23.40. The current law has the minimum reaching $15/hr by 2023, at which point the median wage would be around $26 assuming wage growth stays at a 3% rate on average, as has been for the past year. With this median, a $15/hr wage floor would be 57% of it, staying below the 60% threshold.

So based on this whole 60% line that economists use, Massachusetts chose the right policy. The future $15 minimum wage will cause wage growth that will likely outweigh any reduction in employment. This is not the case though for many other states. Massachusetts has the second highest median wage out of the 50 states and DC. Let’s look at the other end of the spectrum: Mississippi.

Mississippi has the lowest median wage relative to the rest of the US. In 2018, it was $14.70 an hour. As you may assume, the minimum wage here is far less than in MA. In fact, Mississippi does not even have a state level floor. This is only nominal though since they still need to follow the $7.25 national minimum.

Let’s say Mississippi was put on the same path as Massachusetts though. At a $12/hr minimum, they would have a wage floor that is about 82% of their current median. When their minimum reaches $15/hr in 2023, it would be 91% of the estimated median, based on current 3% wage growth. Both of these far surpass the 60% threshold. Looking back to the international graph, these percentages surpass countries like France and Chile, who also break the 60% threshold. Their unemployment rates are 8.8% and 7.2%, respectively.

My point with this is similar to the one from my last minimum wage post: laws increasing the wage floor should be left to states and possibly even cities. Massachusetts and other high wage states, like New Jersey and Maryland, can have a $15/hr minimum that induces more positives than negatives. States like Mississippi that have low median wages would see a different outcome. The bottom half of the wage spectrum would be eliminated, leading to huge labor costs and lower employment.

The on going “Fight for $15” is a great cause, but beneficial only on a regional level. A national increase could still be a universal positive, but at a much lower level than $15/hr. For example, a national $8.75/hr minimum would be a significant increase that is also below 60% of the median wage in states like Mississippi. Now no one is really getting hurt.

Increases higher than this should stay at the state level. Otherwise, the needs of certain states will be a heavy burden on others.

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