33

I often heard minimum wage discussions and typically a single figure is presented (where I live it is the gross monthly value, elsewhere I hear about the gross hourly rate).

However, there are great difference in regard to cost of living within a single country (or even region), so having a single value seems like a "one size fits all" solution.

This Pew Research Center article deals with a specific case from US and I will narrow my question to US to make it more answerable:

One factor complicating the minimum-wage discussion is that the cost of living varies widely – not just from state to state but within individual states, something that’s especially true in large, diverse states such as California and New York.

The article dives into some financial figures but the bottom line is: while the cost of living can be quite different, there is a single value for the minimum wage.

Theoretically, the minimum wage could be somehow tied to the cost of living. I think it could work similarly to different property taxes based on where you live.

Why is minimum wage not tied to the cost of living or a similar factor?

  • 16
    Try to avoid "why not" questions. "Why not?" questions presuppose that the world ought to be contrary to how it is, and that we need to supply a reason for why it is not that way. But that's not how it works. "Why not" questions are hard to answer. Do you speak French? Why not? Did you have porridge for breakfast this morning? Why not? Do you live on the east side of New York City? Why not? How would you even begin to answer that sort of question? – Eric Lippert Jan 10 at 5:44
  • Comments deleted. Comments should be used to provide constructive criticism to the phrasing of the question. Please don't use comments to answer the question or discuss its subject matter. – Philipp Jan 10 at 15:05
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    "Correlated" might be the wrong word to use here, because it implies that you are asking about why there is no statistical correlation between these two things, whereas the body of your question suggests that you are instead asking about why a policy hasn't been implemented to try to fix the minimum wage to follow the cost of living. I would use a more appropriate word, like "fixed," "tied," or "pinned." – kloddant Jan 10 at 18:50
  • @EricLippert - yes, you are correct and I failed to properly explain my expectations. However, this answer shows that there are some cities that have such a thing and I believe this is to partially compensate the big difference in cost of living between these cities and surrounding areas. By "correlated" (now "tied") I meant to have some differences to slightly compensate for rather big differences in cost of living. Of course, the other answer shows that my question is a rather silly one, but I think it still deserves to be answered. – Alexei Jan 10 at 19:39
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    Sounds like a good argument against a minimum wage, as a free market economy can better match wages with cost of living. – Glen Yates Jan 11 at 16:51
37

Short answer - because that's what the proposers of the minimum wage legislation managed to push through.

The USA had a long, long history of unsuccessful attempts to enforce a minimum wage limit, amongst other economic regulations, but the Supreme Court (for a time), in defence of businesses and the free market, ruled all those regulations unconstitutional (the so-called Lochner era). Of particular relevance to your question are two of them:

The first was in 1933. The Roosevelt administration attempted to include minimum wages in the National Industrial Recovery Act. This case did differentiate not only by region, but also by branch of industry (i.e., for example, the agriculture and textile industries would have different minimum wages). This was ruled unconstitutional in A.L.A. Schechter Poultry Corp. v. United States, on the grounds that the federal government had no power to regulate intra-state matters (which, apparently, worker wages are).

The second was in 1938, in the Fair Labor Standards Act - this time, at a fixed rate. This one was upheld by the Supreme Court in 1941 in United States v. Darby Lumber Co., where it was ruled that Congress had the power under the Commerce Clause to regulate employment conditions.

I don't have enough knowledge on the nuances of U.S. internal political games at the time, so I can't say what happened to cause one variant of the act to be declined, while another was upheld, but the end result was that fixed-rate minimum wages became a part of U.S. federal laws. Note that states still could have their own local laws regarding wages - for example, the state of Washington had minimum wage legislation that was held legal in 1937 in West Coast Hotel Co. v. Parrish, a year before the Fair Labor Standards Act was passed. By the way, as it is stated in the article you linked, the situation is changing - some states are passing laws to adjust minimum wages according to the cost of living.

To sum up - the minimum wage being constant and not linked to cost of living in the U.S. isn't an economically-based fact, it's just the historically established legal situation.

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    US v Darby Lumber CO. came during the new Deal era, during which many populist measures arise and were giving Constitutional clearance by SCOTUS in an effort to assuage FDR, so that he wouldn't pack the court. This era saw an expansion in the powers allowed under the Commerce Clause, Tax Clause, Taking Clause, and more. – Drunk Cynic Jan 9 at 12:12
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    That's a good US-centric answer. But minimum wage is a fixed sum in Europe as well, across countries with different laws and constitutional courts. So it's a general scheme, not one that accidentally came about as a result of specific political situations. – Tom Jan 10 at 13:52
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    @Tom The OP has specified that this is a US-centric question, both in the question text and by the use of the 'united-states' tag – kuhl Jan 10 at 21:04
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    @Tom true, but there's a catch: European countries are roughly the same size as a single state in USA or oblast in Russia or province in China - the administrative units that wage adjustment is applied to in these countries, and minimum wage varies from ~2k to ~200 euro from one EU member to another (and also there are Austria and Italy with no minimum at all...). So an argument can be made that the whole of EU is basically equal to one big state with regional minimum wage adjustment. – Danila Smirnov Jan 11 at 3:20
  • @kuhl - yes, but the fact that the same is true for other places indicates that the answer falls short of the whole truth. – Tom Jan 11 at 5:06
20

Danila Smirnov response covers the issue from a US point of view. Worldwide the answer is not different, though. The minimum wage is not tied to the cost of living because the laws which enacted it didn't tie the minimum wage to the cost of living, which is sort of a tautology.

There are, however reasons to not do it that way. First it's the cost of updating it. Employers need to know how much they are going to spend in wages with a certain margin of time - typically, at least a year. However, cost of living can go up quickly in cases of (hyper)inflation, housing bubbles, oil crisis, etc... If you tie the minimum wage to the cost of living you're forcing every employer in the country to update its financial state every time the cost of living is updated. If you update this value very frequently, it is quite a nightmare for everyone and a source of economical unstability, and it will surely scare away foreign (and probably local) investors. If you update it very sparingly, say, once per decade, then it's very loosely tied to cost of living, which will probably have diverged away.

The other problem is that cost of living varies greatly not just at the country level, but even at city level. Here in Spain cost of living of Madrid or Barcelona is twice the cost of living in nearby towns in the same province. If minimum wage is tied to actual cost of living then calculating and managing minimum wages at city level (or even neighborhood level) is perceived (for both governments and employers) as too complicated to handle, and in any case it could make companies to flee the most expensive places to live or distort the urban planning in several other ways. For example, retail workers in Poshtown are forced to live in the edge of Slumvillage so their employers can keep their salaries low. That wouldn't affect much qualified workers, who are paid much more than minimum wage, but it could render cities severely underserviced if menial workers weren't employed there - though, we have very much the opposite problem now where people paid minimum wages can't afford to live where they work due to cost of living being too high.

  • 6
    "If minimum wage is tied to actual cost of living then calculating it at city level ... is too complicated" eh, what? The US government already calculates per diem expense rates for the largest cities across the United States, including territories. See gsa.gov/travel/plan-book/per-diem-rates – BurnsBA Jan 9 at 14:38
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    "in any case it could make companies to flee the most expensive places to live" This isn't really true (see: London, San Francisco, New York). If perhaps you mean this will hurt minimum wage jobs, there are tradeoffs, but it isn't all dire. See for instance a recent discussion of Seattle's increase: nytimes.com/2018/10/22/business/economy/… – BurnsBA Jan 9 at 14:45
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    I've added some text to address both spot-on comments. ;) – Rekesoft Jan 9 at 15:03
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    @Clay07g that's a gross oversimplification. Moving is expensive, and may not be an option if you're already barely making rent. – Morgen Jan 9 at 23:59
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    @Clay07g I've been there, and most of those mitigating factors simply don't apply to a minimum wage situation. Having a job lined up in the new location only really happens if you're transferring within the company or have connections in the new place. The travel costs and time off' work for interviews is prohibitive unless you're newly qualified for a high-income job. Renting requires first, last, and deposit as well as moving costs and that's tough to scrape together. While moving costs may be tax deductible, that means nothing in that tax bracket and doesn't help with out of pocket costs. – Morgen Jan 10 at 8:29
8

Well, in some ways, it is.

At least in my state, municipalities can set their own minimum wage on top of the state minimum wage, and that on top of federal, allowing them to adjust maybe a bit more finely than a federal system. For example, Seattle's minimum wage for large employers is $16.00, while Washington state's is only $12.00. Seattle's minimum wage is now also pegged to inflation.

This allows areas with higher costs of living to set higher minimum wages to compensate.

Unfortunately, many states have banned municipalities from increasing their own minimum wage.

This also hews more closely to the idea of federalism, where many would argue that the massive disparity in cost of living is exactly why the federal government shouldn't be setting wages.

  • Just because a state or municipality is setting a minimum wage doesn't mean it is linked to cost of living. – DJClayworth Jan 9 at 16:22
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    @DJClayworth Well, no, not per se. But it means that areas with higher costs of living can and do often set higher minimum wages to compensate. – Azor Ahai Jan 9 at 16:23
  • While it could be, it's more likely linked to political acceptability. There's also some correlation: cities have higher CoL and city dwellers tend to be more liberal. – Barmar Jan 11 at 17:14
  • @Barmar I'm not sure what your point is. When people pushed to raise Seattle's minimum wage, the argument was explicitly that the CoL in our locale was higher than Washington's or the national average, and so our workers required a higher minimum wage. – Azor Ahai Jan 11 at 17:22
  • @AzorAhai Of course that's why people pushed for it. But they were only able to pass it because it was politically acceptable to the citizens and city administration. – Barmar Jan 11 at 17:28
4

As other answers have said, this is about what the legislators have been able to pass. Some people are opposed to minimum wage laws and some are on the fence. Making them 'index linked' (i.e. tied to cost of living) would cause more people to oppose them.

Even proponents of minimum wage laws mostly admit that there would be economic conditions under which raising minimum wages in line with inflation would be a severe problem. In times of economic recession, when wages generally are not rising, it makes little sense to raise minimum wages; similarly in times of high inflation, when price rises are outstripping wage rises, or worse still when both are occurring together - the dreaded 'stagflation'.

Rather than have to pass legislation to specifically undo the index linking under these conditions, proponents consider it better to legislate each individual increase.

1
  1. The cost of living is usually correlated with improved living conditions (otherwise, why pay more to live there?). So if you tie the minimum wage to the cost of living, you're basically rewarding low-income people for living in a good neighbourhood. It's unclear if that's the original intention.

  2. It would be unclear at what organizational level one would calculate the cost of living: State, city, district, house? The more detailed you go, the more effort you have to put in.

  3. People in low-income entities might very well object to a minimum wage from which they barely profit. This would risk the idea as a whole.

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    The cost of living is usually correlated with improved living conditions, citation needed, and I beg to differ. London has the highest cost of living in the UK, but people in Yorkshire or Inverness are a lot happier. The air in London is very polluted. The reason London has a high cost of living is not because of better living conditions (which is subjective), but because there are many (well paid) jobs in London, unlike Yorkshire or Inverness. – gerrit Jan 9 at 14:26
  • Even more to the above, cost of living does not correlate with improved living conditions in times of high inflation. – DJClayworth Jan 9 at 15:17
  • These sound like reasonable ideas, but do you have any evidence that these are the reasons used by policy makers in their decision making? – indigochild Jan 9 at 19:35
  • @gerrit If living conditions were better in Yorkshire, people would migrate there, plain and simple. The fact that there are more jobs and services in London is reason enough to say the living conditions are better. – Shautieh Jan 11 at 11:29
  • @Shautieh Only if you define living conditions only by the availability of jobs. I would move to a rural northern area if I would have a job there, and I'm not the only one. – gerrit Jan 11 at 11:35
0

In Australia there is an independent organisation under the Federal government who is responsible for setting Minimum wage every year.

They accept submissions from interested parties such as unions, industry, etc and set an increase to the minimum wage.

  • 1
    I think this question asks primarily about the situation in the U.S. – JJJ Jan 10 at 2:41
  • That doesn't answer the question "why do they set the same minimum wage across the whole of Australia, rather than higher rates in more expensive places and lower rates in cheaper ones?" (which is the question the OP asked). – Martin Bonner Jan 10 at 15:47
  • There is a national minimum wage but there is also each industry has an "award" which can also have other conditions attached to it. fairwork.gov.au/how-we-will-help/templates-and-guides/… – LukeM Jan 11 at 5:35
-1

They are correlated, if minimum wage goes up, the cost of living will go up, but that doesnt happen the other way around. So if you increase the minimum wage depending on how much the cost of living increased, you would have an inflation spiral (increase the minimum wage -> the cost of living goes up -> increase the minium wage -> the cost of living goes up, and so on). That's why in most places around the world the minimum wage is NOT adjusted automatically (let's say attached to inflation index or something like that) and instead is debated.

Sorry for my english.

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