How Tiered Minimum Wages Can Offer Bipartisan Compromise

In recent years, and particularly in this presidential primary election cycle, focus on raising the minimum wage has been a contentious issue that has divided the ideological spectrum. The Congressional Budget Office noted in a 2014 study that an increase in the minimum wage to $10.10 would cost about 500,000 jobs. The GOP rejoices. The CBO also noted in the same study that the $10.10 an hour jump would also result in higher earnings for about 16.5 million low-wage workers. Liberals rejoice. And the cycle continues.

Political economic discourse, especially the minimum wage debate, all too often thumbs its nose at discussing compromised approaches to an issue, trying to bridge the partisan gap. Because the CBO noted that the positive and negative effects of increasing the minimum wage are mutually exclusive, partisan talking points takes control of the dialogue. Practical applications never quite seem to take hold in the discourse or in the media. However, there are two compelling policy implementations of a minimum wage that may solve some of the concerns from both sides of the aisle.

The minimum wage is the lowest per hour wage that can be legally paid to employees and it is the price floor for which laborers can work. Minimum wages differ in several jurisdictions within the U.S. system. The federal minimum wage is the lowest possible amount that employers can pay workers at $7.25. States have differing minimum wages — the highest current minimum wage being $10.50 in the District of Columbia and the lowest being the federal minimum wage in a majority of states. Lastly, some cities have higher municipal minimum wages than others and much of the debate around minimum wages has centered around the implementation of $15 minimum wages in some large cities. In sum, the minimum wage is the lowest possible legal hourly wage. Jobs that are not covered by the minimum wage would be non-hourly paid positions, hourly paid positions in excess of the minimum wage, or positions that are paid “under the table,” such as golf caddies that are paid in cash tips.

Now, many individuals will also argue that it would make sense economically to go without a minimum wage. They argue that having a wage floor limits the number of available jobs that people could work by pricing employers, who would otherwise pay less for low-skilled labor, out of the market. The counterargument is simple, the minimum wage is needed to protect taxpayers from shifting tax burdens onto tax-paying skilled laborers. If there is unemployment within the labor market, firms have little incentive to pay employees a living wage, which is the wage at which an individual can sustain themselves at the minimum standard of living. Meanwhile, employees have little say in the matter if the consequence is unemployment and an absence of a mandated minimum wage and unemployment may push wages down further. In order to support these employees living under subsistence levels, higher skilled workers would be forced to subsidise the wages of the unskilled through rising taxes because most government tax revenue comes from households rather than firms (if firms bore the brunt of the tax increase, unemployment would likely increase, which would further drop the wages equilibrium). Mandated minimum wages, as a result, prevents the tax burden from shifting to higher-skilled employees. None of this argument is meant to neglect the moral questions surrounding in increasing the minimum wages, but rather to satisfy the economic critiques of those critical of the minimum wage as a whole.

One proposed solution, implemented in Australia, takes a tiered approach to the minimum wage based on the employee’s age. There, a worker can be paid less than the federal minimum wage if under the age of 21, and once reaching the cutoff age of 21, the tiered wage ends and the federal minimum wage remains the same. The following chart illustrates, in Australian dollars, how individuals are paid based on age under the current minimum wage laws in Australia.

The original purpose of this approach to the tiered minimum wage was to allocate higher pay to older “breadwinners” that support families. In the U.S., minimum wage workers consist of 64% of part-time workers and nearly half of all minimum wage workers are employed in the foodservice industry, according to the Pew Research Center. Moreover, 50% of minimum wage employees are under the age of 25. The implementation of a tiered minimum wage, or subsequent wage hikes departing from the current $7.55 per hour that differ based on employee age, would have several implications, most of them positive.

Let’s take an extreme scenario assuming the “$15 per hour minimum wage” movement gets its way, along with a tiered minimum wage until the age of 25 for those 50% of minimum wage workers. Obviously, the goal would be to raise the wages for the “breadwinners.” On the one hand, this tiered minimum wage may incentivize employers to hire the cheaper under-25 labor over the “breadwinners,” pushing down the higher unemployment rates among recent high school graduates and teenagers. On the other hand, this may have no impact on some businesses, who may choose to keep their older “breadwinner” workers to avoid overhead costs of training and employee turnover, typical of businesses operating with many younger employees. The Center for American Progress noted that for workers making less than $30,000 per year, turnover results in replacement costs of between 10 and 30 percent of the employee’s annual salary. Moreover, this approach may limit job turnover among younger employees as they would see their pay automatically rise with age and experience, which could serve as an incentive for them to stay on the job. For example, my first job was in the kitchen of a retirement home. When I was first hired, I was making the minimum wage and was questioning why I would stay employed if I could make just as much money for less amount of time — cash only and untaxed no less — working as an umpire for the local youth baseball league. However, my employer laid out the timeframes for various increases in my hourly wage and I saw that the positive aspects of this job could outweigh the negatives. This is an example of the way that a structured increase can incentivize employees to remain employed. Obviously, many of these younger employees would eventually leave for higher paying jobs or those more relevant to their interests, like I eventually ended up pursuing.

The downside that critics point to in this approach, however, is the argument that young employees need a higher minimum wage just as much as the supposed “breadwinners” because of the inherently higher youth unemployment rates and spiraling student loan debt. The common conception of minimum wage employees is the wide-eyed, acne-riddled teenager at a fast food restaurant. However, as the Pew Research Center noted, over one quarter of employees working at or below the minimum wage are between the ages of 20–25. The Bureau of Labor Statistics also notes (Table 6 of the link) that college graduates have surprisingly high share of the number of jobs that are employed at or below the minimum wage — about 15%. While the number of college graduates that fit this description may not necessarily be recent college graduates, the findings of the Economic Policy Institute show that graduates are making less than they were 15 years ago. Consequently, the tiered minimum wage approach based on age may not be popular for this large slice of the minimum wage labor force of recent college graduates that have massive student loans to pay off.

A second proposed solution, also consisting of a tiered minimum wage, which has been implemented in Oregon, adjusts for cost of living by region. Starting in 2022, larger cities would have minimum wages of $14.75, smaller cities $13.50, and $12.50 in other rural areas. Municipalities with larger populations typically have a higher cost of living due to higher real estate and rent prices, and costs of goods and services. The argument follows that the minimum wage should be higher than more rural municipalities whose cost of living is lower. The goal of this policy would be to create roughly equal purchasing power for a minimum wage worker everywhere in the country. Increasing the purchasing power for laborers may economically jumpstart local areas where it’s implemented. This also factors in that small business owners in rural areas have much less foot traffic and are frequently adversely impacted by minimum wage hikes than small business owners in urban cities.

This too poses some problems. For example, the Michigan “Death Star” law has outlawed this tiered system in municipalities. The thinking follows that it doesn’t make sense for a McDonald’s, for example, to have to pay more to its employees than the Taco Bell on the other side of the road if that road delineates two different wage regions. While disparities in purchasing power may be small among neighboring cities, but can vary significantly within states. For example, minimum wage employees working in Kankakee, Illinois can make a cost-adjusted wage of $8.29 per hour and be paid nearly $2 less than an employee in Danville, Illinois making $10.42 cost-adjusted wage.

In part, the purpose of passing this law may be because lawmakers are not thrilled about the idea that municipalities can go about setting their own wage floor arbitrarily, creating a patchwork of minimum wage policies that may exacerbate disparities in purchasing power, even within states. However, this is why this approach should be implemented on a federal level with the help of economists and proper data. The first step in assessing minimum wages in various areas would be to establish a national average for the minimum wage using some metric. Some have suggested setting the national minimum wage at half of the average hourly wage of private sector workers. Since the Bureau of Labor Statistics issues a monthly report on this figure, it would not be difficult to track and would allow those in charge of implementing a federal minimum wage more insight into either raising or lowering the wage based on annual reporting. Some, however, have suggested setting the national minimum wage floor at the lowest living wage in the U.S. and then base subsequent minimum wages on Regional Price Parities (RPPs), models that indicate regional costs of living. The Bureau of Economic Analysis already delineates Metropolitan and Micropolitan Statistical Areas (MSAs). Where these areas fall based on their Regional Price Parity would determine the tier that these areas would fall under. The last step would be to peg a minimum wage to each tier for a given year. Certain MSAs falling or rising in RPP in a given year would be moved into different tiers the following year.

The current labor market following economic disaster of the Great Recession of 2008 has seen an increase in people living on the margins and low upward mobility. The poverty rate has increased to include over 45 Million Americans. As noted above, college graduates and other skilled laborers are now making less than they were 15 years ago. The Recession hit small business owners particularly tough. While conservatives may argue that policies need to protect small business owners and liberals may argue that these policies need to protect those living on the margin, there seems to be no discussion on practical policies to resolve this issue. Hopefully discussing the tiered wage system opens the door for more alternative solutions that are currently being overlooked in the minimum wage debate.

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