Per-Capita Income, not Median Income, Must Drive Minimum Wage

The Washington Center for Equitable Growth argues for indexing the minimum wage to the median wage.

They make two arguments against indexing to mean wage—we argue for indexing to mean income per capita—which don’t hold.

This approach is better than using the average wage, or mean wage, as the peg for the index. If the minimum is indexed to the mean wage, when minimum-wage workers receive a raise, the average wage rises, which then increases minimum wages, and so on. Over time this process increases the share of the workforce earning the minimum wage, compelling employers to bear continually larger increases in labor costs.

Washington Center for Equitable Growth

This argument presupposes that a higher minimum wage drives a larger minimum-wage workforce. The opposite is actually true: a lower minimum wage increases the minimum wage-workforce.

As minimum wage decreases, all wage earners above the minimum can purchase more minimum-wage labor. Minimum wage jobs include retail, fast food, and other high-consumption consumer service jobs, and so lower-cost minimum wage labor allows higher consumption per-capita of these services and the related labor.

Purchasing the same products at lower prices thanks to lower labor costs means money is left over. Increased purchasing of these and other services raises the size of the workforce. Because these goods are more readily-consumed with additional spending power than other goods—and because other goods are produced with much-more-productive labor—the extra labor demand is disproportionately allocated to minimum wage labor.

Increased labor demand causes increased labor supply, whether by immigration or increases in fertility decisions, although fertility decisions are more-complex and can increase when unemployment increases if minimum wage is sufficiently low and welfare can more-effectively support child rearing. One way or another, a lower minimum wage eventually leads to a faster-growing labor force taking up proportionally more minimum-wage jobs.

In contrast, if the minimum is increased in line with the median wage, then the share of the workforce earning the minimum wage will remain roughly constant over time. This is because the median wage moves independently of the minimum wage. The benefit of keeping the minimum wage constant as a share of overall wages is that workers competing for low-wage jobs would find demand for their labor among employers equally constant.

Washington Center for Equitable Growth

This repeats the second error in the first quote: it assumes minimum wage does not impact median wage.

If the minimum wage rises from $10/hr to $15/hr, what happens to workers making $14? Zipperer implies these workers will receive $15, which begs the question: why were they receiving $14 in the first place? Surely they either have some negotiating position to obtain above-minimum wages or they don’t; it can’t be both.

In practice, minimum wages lift median wages. That $14/hr worker might not get a 50% increase ($21/hr), yet will still earn more than $15/hr. It’s conceivable they may earn $19/hr, or $17.50/hr, but certainly not $15/hr—else why exercise what special qualifications the job requires which are not necessarily possessed by anyone who can stock grocery shelves?

Consider, for example, an overnight baker at a Panera. Why work overnight making bread when you can work during the day stocking shelves at the same wage? If you make $16/hr today and the new minimum is $15/hr, would you consider leaving behind one dollar of wage to get away from night shift?

Zipperer makes a larger mistake with the above quote. To explore, let’s consider:

Examining how the minimum wage would change over time if it were indexed to other measures of economic activity, such as prices or wages, is fairly straightforward. 

Washington Center for Equitable Growth

So what does their chart look like?

A minimum wage, indexed to median wage, would reach $8.26/hr in 2014. How does that compare to per-capita income?

Median and Minimum Wage as an annual full-time income, shown as a portion of per-capita income.

In 1950 (not shown), the minimum wage of $0.75/hr paid $1,560 for a year’s work, compared to a per-capita income of $2,247. That’s almost 70%.

We see this up to 1970, often higher. Minimum wage represented 69% of per-capita income in 1960, 67% in 1965 and 1967, and 66% in 1968. It was higher—as high as 78%—in intervening years.

The 2/3 GNI/C number reflects this per-capita income. The 2014 figure would be $18/hr by this measure, far above the $8.26/hr figure given. We can’t switch to that overnight, but it’s a perfectly reasonable target, considering other nations and the United States’s own history:

The United States trails other nations in minimum wage levels as a percentage of per-capita income.

Perhaps most interesting, while the minimum wage has reflected a slightly-smaller percentage of the median income, it has stayed comparatively level. Minimum wage fell from 40% of the median income in the 1960s to 25% in recent years.

In the same time span, the median income fell from 165% of per-capita income to 101%—the 2014 figure was as low as 95.6%. That’s only 61% of its 1960s level.

Median household incomes also reflect a higher labor force participation, and the 2013 median wage was only $34,750/year, versus $4,000 in 1960. That’s moving from 132% of per-capita income to 64%, cutting the minimum wage by more than half.

Median income, median wage, and other median measures—measures of the distribution of negotiating power—don’t provide a stable basis for setting a minimum wage. By contrast, per-capita income reflects our actual productivity and wealth, and minimum wage as a portion of per-capita income ensures a fair share to all workers. We must index the minimum wage to the per-capita income.