The Third Way

Arkansas, Alaska, South Dakota, and Nebraska all voted to raise their minimum wages in 2014. So did the cities of Seattle, San Francisco, and Oakland. While it was widely reported that these areas were increasing wages above the federal minimum wage of $7.25, one point was often missed—adjustments varied greatly from one region to another.

Arkansas and South Dakota voted to raise their wage to $8.50. Nebraska raised their wage floor to $9, and Alaska raised their wage to $9.75. Seattle and San Francisco moved to raise their wages to $15.

Some presidential hopefuls for 2016 have called for a $15 per hour minimum wage to match the wage floors of the highest-cost cities in the nation, but, as we discuss below, a single federal minimum makes less and less sense due to wide cost disparities between cities and states across the country.

In our foundational report, Ready for the New Economy, we laid out a series of challenges that are profoundly shaping the evolving economy in the 21st century. One key area: increasing wealth for low- and middle-income families and giving them a better shot at financial security. In this brief, we lay out a series of issues with one aspect of that—a single federal minimum wage—and propose a unique regional minimum wage based on average hourly wages and regional cost variations, with readjustments every three years. This idea would permanently end the debate over the federal minimum wage, adjust for regional differences in the purchasing power throughout the country, provide all workers a more livable standard of wage, and still allow states and localities the freedom to set regional wage standards.

The Problem

There are two seminal issues policymakers need to confront on the minimum wage. First, purchasing power has dropped across the board for minimum wage workers since 2009, but, second, the magnitude of this problem varies greatly depending on where one lives.

Take the first issue—money doesn’t buy you what it used to.

There are few communities in the country where the current federal minimum wage of $7.25 can support even a basic standard of living for one adult, according to MIT’s living wage calculator (which estimates how much a worker would have to earn in wages to support a household given local expenses and prices).1 Part of that problem stems from the fact that there has been a significant decline in purchasing power since July 2009—the last time the federal minimum wage was updated to its current level of $7.25 per hour. The cost of goods has increased 10.5% nationally since the last federal minimum wage update.2

Comparing Living Wages across Different Regions
Living Wage calculators, such as the one developed at MIT, provide cost-adjusted estimates of what workers and their families need to make in order to support a basic living in the communities in which they reside. The developer of the MIT Living Wage calculator, Dr. Amy Glasmeier, defines a living wage as “the wage needed to cover basic family expenses plus all relevant taxes” (excluding government transfers and housing assistance).3 This is just one of many calculations and definitions of a “living wage,” but one of the greatest utilities of this tool is that it highlights the varying wage needs across different regions of the country. For instance, according to this tool, the living wage in Jackson, TN is estimated at $9.63 per hour for one adult,4 where the living wage in the Washington, D.C. area is estimated at $14.78 per hour for one adult.5
For example, when the current $7.25 minimum wage took effect in July 2009, the average cost of a gallon of milk nationwide was $2.99. In September 2015, the same gallon of milk averaged $3.39, or 13% more expensive.6 Electricity per kilowatt hour is 7% more expensive, ground beef per pound is 50% more expensive, and a carton of eggs is 98% more expensive, while a gallon of gasoline is 13% less expensive.7 If 2009’s $7.25 minimum wage kept pace with inflation, it would be $8.02 today.8 Nationally, the federal minimum wage’s purchasing power is down 33.7% from its peak level in 1968, and the federal wage floor would have to be $10.94 today to have the same purchasing power.9

The erosion of purchasing power has disproportionately impacted the minimum wage worker, as the gap between the average-paid worker and the minimum-wage worker has widened. Since 2009, the gap between the average hourly earnings of a production and non-supervisory worker in the private, non-farm sector was $12.58 in today’s dollars.10 Today, six years later, the pay gap between the average worker in this classification and a minimum wage worker has grown to $13.83—a 10% widening in just six years.11

But there is a second, less-discussed issue—the degree to which wages have been diminished varies greatly depending on where you live.

The price of goods and services is significantly different in one area of the country to another, which has implications for the relative value of each dollar earned by workers. A federal minimum wage, whatever the level, will go much further and carry much more value in a low-cost area, like Jackson, TN, where everything from groceries to rent can be bought for less than in a relatively high-cost area, like San Francisco, CA. The 2013 price data in Table 1, below, illustrates the varying price points on common household expenditures that workers face in three cities.12

The cost differences between one area of the country and another are aggregated by the Bureau of Economic Analysis at the U.S. Department of Commerce and reported in the form of Regional Price Parities (RPPs).13 RPPs are expressed as a percentage of the national average of the cost of common consumer goods and services. A score of 100 on the RPP represents the national price average. So, an area with an RPP of 110 experiences costs that are 10% higher than the national average. Residents of an area with an RPP of 85 experience costs that are 15% lower than the national average.

RPPs can be used to calculate purchasing power, which is what a dollar of wages in one area of the country is worth compared to another area of the country, given differences in local prices.14

For example, as shown in Table 2 below, metropolitan Honolulu has a RPP of 122.5, which means the costs of living in that area are 22.5% higher than the national average. Using this number, we can determine that Honolulu’s $7.75 minimum wage in 2015 was actually worth $6.33 after factoring in the relatively high cost of living.15

Further down in “Low-Cost Areas” on the same table, the area around Rome, GA has an RPP of 81.3, indicating costs of living that are 18.7% lower than the national average. After adjusting for that area’s lower relative costs, the federal minimum wage of $7.25 had purchasing power equal to $8.92.16

The goal of minimum wage policy should be to afford all American workers, regardless of where they live, similar basic wage standards. But Table 2 also shows that purchasing power, or the cost-adjusted value of wages, fluctuates greatly from one area to another, sometimes even within the same state. This means that a big box store cashier in Kankakee, IL (earning a cost-adjusted wage of $8.29 per hour) is actually being paid more than $2 per hour less than a cashier working for the same big box store in Danville, IL (earning a cost-adjusted wage of $10.42) at the same nominal wage of $8.25, for the same work.

What does all this mean? With wide disparities in purchasing power and living wages across the country, a single federal minimum wage standard encourages the patchwork of state and local minimum wage policies that leads to inconsistency between similar economies and less purchasing power even in states with higher wage floors. At the federal level, a single minimum wage, regardless of what the level is, will have disparate impacts on workers, employers, local governments, and local economies depending on where they are located. Differing impacts across the country will either excessively raise employer hiring costs to a point leading to unnecessary job losses, or leave workers in high-cost areas unable to afford a basic standard of living.17

The Solution: A Regional Minimum Wage

We propose to replace the single federal minimum wage with a regional minimum wage based on average hourly wages and regional cost variations, with readjustments every three years. To do this, we would establish different regional wages—for low-cost regions, high-cost regions, and regions that are at parity with the national average. If implemented today, we estimate that regional minimum wages across the country will range from $9.30 per hour to $11.90 per hour.

The first step is establishing what we refer to as a “national average” for the minimum wage. We would set the national average at 50% of the average hourly wage of private sector, non-supervisory workers. The Bureau of Labor Statistics puts out a monthly report on this figure,18 and in November 2015 it was $21.19. Therefore, the national average minimum wage would be $10.60 (50% of $21.19).

The second step would be to group areas of the country into five tiers based on their RPP. The Bureau of Economic Analysis maintains databases with RPPs by metropolitan statistical areas (MSAs)—an area consisting of one or more counties comprising an urban core of at least 50,000 people, plus surrounding counties with commuting ties.19 MSA data should be used over state-level data in order to truly assess each area’s economic profile.

The third step would be to assign each tier with a corresponding wage. For example, MSAs with RPPs within the 95.0 to 104.9 range (Tier 3) would have a federal wage floor equal to the national average minimum wage. If this policy were implemented immediately, about 110 metropolitan areas20 including Santa Fe, NM, Allentown, PA, and Chico, CA would have a federal wage floor at $10.60.

Lower-cost areas with RPPs within the 90.0 to 94.9 range (Tier 2) would have a wage floor set at 92.5% of the national average, rounded to the nearest dime. If this were put into place today, 147 low cost communities including Birmingham, AL and Oklahoma City, OK would have a $9.80 minimum wage.

Higher-cost areas with RPPs within the 105.0 to 109.9 (Tier 4) range would have a wage floor set at 107.5% of the national average, rounded to the nearest dime. If this were put into place today, 15 higher-cost areas including Miami, FL and Boulder, CO would have an $11.40 federal wage floor.

The lowest-cost areas with RPPs less than 90.0 (Tier 1) would have a wage floor set at 87.5% of the national average, rounded to the nearest dime. So, if this were put into place today, 92 of the lowest-cost communities including Beckley, WV and Rome, GA would have a $9.30 federal wage floor.

The highest-cost areas with RPPs at 110.0 or greater (Tier 5) would have a wage floor set at 112.5% of the national average, rounded to the nearest dime. Again, if this were put into place today, 17 of the highest-cost areas including the Bay Area (CA) and New York City metro areas would have an $11.90 federal wage floor.

Table 3, below, shows that a regional minimum wage in these five tiers would do a far better job providing all workers with a similar degree of purchasing power than any single minimum wage could do. Highlighted blue, Column 1 shows an area’s current minimum wage and Column 2 shows their current purchasing power. As you can see, currently there is a huge variance in purchasing power—ranging from $6.33 in Honolulu to $10.87 in Santa Fe among these select cities.

Our approach is demonstrated in Columns 3 and 4, shaded green. Column 3 shows what the new regional minimum wage would be, and Column 4 shows what purchasing power would be for that rate. As you can see, when minimum wages are adjusted for costs of living, minimum wage workers have about $10 to $12 of real wages, regardless of where they live.

Wide variances in purchasing power paired with a single federal minimum wage cause uneven economic impacts throughout the country. Graphic 1 illustrates how widely purchasing power varies at any single minimum wage.21 In this example, a single $10.60 federal minimum wage has purchasing power ranging from $8.65 (blue) to $13.59 (orange). The map shows that large cities on the east and west coasts have purchasing power closer to $8.65, while metro areas in the Southeast and Midwest have higher purchasing power with the same minimum wage.

Graphic 2 illustrates how a regional minimum wage significantly eliminates variances in minimum wage purchasing power.22 The graphic shows a largely monochromatic map indicating that while the nominal minimum wages would range from (in the case of a $10.60 national average minimum wage) $9.30 to $11.90, purchasing power would be similar across the country.

Basing the regional minimum wage on average hourly wages and regional cost variations reduces the need for extended phase-in periods, and automatic readjustments every three years will ensure that workers are paid wages that match their economic circumstances. Areas of the country that are outside of the MSAs generally fall into Tier 1 with the lowest cost of living. MSAs can be updated every 20 years to account for significant population changes and/or significant changes in inflation.

This proposal would do nothing to Fair Labor Standards Act provisions that allow a state or locality to enact a minimum wage higher than the levels set within this proposal. In states and localities where a higher minimum wage is in place or established, the state or local wage standard would apply.

Also, any update to the federal minimum wage should also raise the phase-out range for the Earned Income Tax Credit (EITC) to ensure that increases in wages would not result in a reduction of EITC benefits for those earning the minimum wage. This proposal would do nothing to diminish the EITC’s incentive to work.23


This regional wage approach would ensure that all minimum wage workers will have fair basic wages, regardless of where they live, while minimizing reductions in employment and economic distortions in low-cost areas. This policy would ensure that a cashier in Manhattan is essentially earning the same minimum wage in real terms as a cashier in Carbondale, IL and largely addresses fears that a big city minimum wage would destroy jobs in low-cost small towns.

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