The most absurd plank to appear in either party's platform this year is the Democrats' call to "raise the federal minimum wage to $15 an hour over time and index it." It is policy written for the nation's very wealthiest enclaves, but incoherent for economically distressed regions. Looked at from El Paso, Texas, where the median hourly wage is only $12.70, a national $15-per-hour minimum sounds no saner than a $29-per-hour minimum would in Washington, D.C.
“It is no coincidence that the Fight for $15 first gained momentum in prosperous cities where median wages significantly exceed the national level.”
Until very recently, even proponents of minimum wage increases acknowledged that a minimum should retain some rational relationship to a labor market's median wage -- a ratio called the Kaitz Index. If the minimum wage is too far below the median wage, it would fail in its goal of lifting low-wage workers toward the middle class. If it is too close, its distortions would be too great for too many jobs.
Writing for the Brookings Institution's Hamilton Project in 2014, University of Massachusetts professor Arindrajit Dube observed that "a natural target is to set the minimum wage to half of the median full-time wage." Last year, Larry Mishel and his colleagues at the Economic Policy Institute likewise focused their analysis of viable minimum wage increases on the Kaitz Index and targeted a ratio of just over 0.5.
The critical insight of the Kaitz Index is this: Minimum wage increases are the byproduct of a healthy labor market, not the catalyst for one. Where the rising tide of wage growth has lifted most but not all ships, a rising minimum might help buoy those otherwise caught below the water line. But in the absence of economic trends that push wages higher, a rising minimum will not create those trends. Rather, it will leave the lowest-wage workers and their employers high and dry.
The "Fight for $15" movement turns economic reality on its head, pushing a single minimum regardless of whether a market appears capable of bearing it. Henrietta Ivey, the Fight-for-$15 activist who spoke at the Democratic National Convention on Thursday night, might feel that "$15 an hour should be a no-brainer" because "this is one of the richest countries in the world" and "it'll help us have a livable lifestyle," but those are not arguments that anyone would hire her at such a wage.
It is no coincidence that the Fight for $15 first gained momentum in prosperous cities where median wages significantly exceed the national level. The median wage in Silicon Valley is $28; in Washington, D.C., $25; in New York, $22. The University of Washington has found that a minimum-wage increase to $11 per hour in Seattle (median wage of $23) produced little net benefit or cost to workers. But that says little about what undesirable effects an $11-per-hour minimum might produce two hours away in Yakima, where the median wage is $15.71.
Such sharp variations across America's enormous and diverse labor market make the federal minimum wage a dangerously blunt instrument. But state and local governments can set higher minimums for their own labor markets, and many have done just that. The 13 states with the highest median wages all have minimum wages at least $1 above the federal minimum. Analysts focused only on the national Kaitz Index of 0.41 (a $7.25 federal minimum wage and a $17.40 median) conclude America lags behind the 0.46 average for a basket of peer economies like Japan (0.39), Canada (0.45), Korea (0.46), Netherlands (0.48), United Kingdom (0.48) and Australia (0.53). But factor in state and local minimums and the American Kaitz Index jumps to 0.47 -- precisely in line with international benchmarks and the 0.5 rule of thumb.
Perhaps the federal minimum could go 10% higher; plainly it cannot double. In places like El Paso, Myrtle Beach (median wage of $12.20) and Porterville, Calif., ($13.84), a $15-per-hour minimum would be 10%-20% above the median. Unless the activists and politicians in New York, San Francisco and Washington believe their own cities could handle such distortions in their own markets -- minimums in the range of $24 to $34 -- they should be hesitant to suggest it for the weakest local economies. Nationwide, 20 million jobs are in markets with a median above $20 per hour, but 11 million jobs are in markets below $15; 43 million are in markets below $17.
None of this was controversial just two years ago, when Dube wrote for Brookings that "no one expects that the minimum wage should be set equal to the median wage." But for large swathes of the country, "no one" now includes the Democratic Party. Perhaps a $15-per-hour federal minimum wage is just an opening bid. But if this is the Democrats' version of Donald Trump's "make Mexico pay for the wall," it is just as irresponsible and deserves the same derision.
This piece originally appeared in Investor's Business Daily
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Oren Cass is a senior fellow at the Manhattan Institute. Follow him on Twitter here.
This piece originally appeared in Investor's Business Daily