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The House of Representatives recently voted to nearly double the national minimum wage from $7.25 to $15 per hour. Democrats are rejoicing that this change, if passed by the Senate, will lift 1.3 million people out of poverty. Republicans are complaining it will cost 1.3 million people their jobs.
According to the Congressional Budget Office, both are right.
Remarkably, neither side has addressed a much bigger issue: a national fixed minimum wage poses a gross inequity when adjusted by local cost-of-living expenses and taxes. Those vary enormously from state to state.
The dollar amount of the minimum hourly wage isn’t as important as what workers have left after paying taxes and what the remainder buys in goods and services. For example, a $15 hourly wage in a state with high taxes and a high cost of living is hardly equal to the same $15 hourly wage in a state with low taxes and a low cost of living.
I did a comparison, adjusting a $15 minimum wage for state and local taxes and for the cost of living, using data from the Council for Community and Economic Research as presented by the Missouri Economic Research and Information Center. I selected Washington DC as my base location for comparison, as it has the second highest cost of living in the U.S. behind Hawaii. It is also representative of the cost of living and taxes in many major metropolitan areas, where the drive for a $15 minimum wage is strongest.
After adjusting for the cost of living and taxes, the purchasing power of a worker earning $15.00 an hour in Washington DC is equal to a worker in Mississippi earning just $8.46 an hour. In South Dakota, someone earning $9.67 an hour has the same purchasing power as someone earning $15.00 an hour in Washington DC.
A flat "one size fits all" wage does not consider local variations in cost of living and taxes. Currently, 51.1 million workers earn less than $15 an hour. The CBO’s data says that forcing small businesses in low cost-of-living states to raise wages to match a wage in high-cost municipalities like DC will cost 1.3 million to 3.7 million employees their jobs and raise costs for everyone.
But no worries, according to Jim Tankersley and Emily Cochrane in a New York Times article on July 8, 2019 titled, "$15 Minimum Wage Would Reduce Poverty But Cost Jobs." They wrote that the money to fund the wage increases would come, "mostly at the expense of business owners, who would earn lower profits because of increased labor costs, and other higher-earning Americans, who would pay more for goods and services, like food in restaurants."
This reasoning is grossly naïve.
The money to double many worker’s wages would not simply come out of profits, as many businesses don’t have enough profit to absorb the increased costs. Nor would it realistically come from the rich paying more for goods and services. Higher prices would raise living costs for everyone, not just the rich. The result of higher prices is falling revenues to businesses as fewer consumers can afford to sustain their current levels of spending.
Instead, a $15 national minimum wage would make lower-paying jobs even more scarce while the cost of living would increase, wiping out the advantages of the higher minimum wage for many.
States need the power to set their own minimum wages to account for local cost-of-living expenses and taxes. A federal minimum wage needs to accommodate the states with the lowest cost of living. It is a floor, not an average or a ceiling.
Rick Kahler, MSFP, ChFC, CFP®, CCIM, is president of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
