Activists in Portland, Maine want to raise the minimum wage to $12 an hour, or maybe even $15. President Barack Obama wants to set the federal minimum wage at $10.10. The argument is that it will help working families without harming the economy because workers will put their pay raises back into the economy. But opponents counter that payroll is often a business’s biggest expense, so a higher minimum wage will increase unemployment among low income families and cause some small business to go under.
This debate is reminiscent of the claim that cutting taxes will increase government revenues because lower taxes create economic growth. When taxes are high this has merit (up to 70% income tax rate before President Ronald Reagan took office). But when taxes are low (Reagan cut it to 28%) government debt rises.
There’s got to be a happy medium. And the same is true for the minimum wage. Economists talk about the point of diminishing returns, meaning that something might have a positive effect, but only up to a certain point. Then the effect wears off. They also talk a lot about curves because it looks like an upside down U when you graph it.
The Portland Press Herald reported on a study by the University of California, which found that a minimum wage that’s more than 60% of the median hourly wage will harm businesses and make things worse for the working poor as unemployment rises. But below that the researchers claim there will be little negative impact owing to a combination of workers spending their pay raises and businesses finding ways of shifting costs.
In Maine, this means a minimum wage of $9.60 an hour, up from $7.50. But there are significant regional variations. Northern Maine couldn’t handle an increase above $7.96.
This highlights a problem with a one-size-fits-all national (or even state) minimum wage. Mississippi’s economy is markedly different from Los Angeles.
Of course, the notion that the minimum wage should be 60% of the median hourly wage for a certain area is bound to be controversial. But reconceptualizing the minimum wage as a percentage of median income for a region rather than a fixed dollar amount for the entire country is certainly a debate worth having.