Wage Variability Found to Be Drastically Variable at Local, State Levels

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In recent months, the minimum wage has moved to the center of the economic policy debate. Proposals for minimum-wage increases are being introduced at the local, state, and national levels of government. Nationally, President Barack Obama is working alongside congressional Democrats on a push to raise the federal minimum wage from its current level of $7.25 to $10.10 by 2016.

At the state level, 20 states and the District of Columbia have minimum wages above the federal level, and on January 1, 13 states raised their minimum wage, with California set to follow suit with an increase to $9 in July. Of these 14 state increases, nine are automatic adjustments based on indexing the value of the minimum wage to the cost of living, while four (New Jersey, Connecticut, New York, and Rhode Island) are the product of either ballot measures or legislative action.

City governments have also taken action on this issue. Last year in San Jose, California, voters approved a measure raising the minimum wage to $10 an hour, including an annual cost-of-living adjustment that will keep the San Jose wage above the California-wide minimum. Likewise, in SeaTac, Washington, voters approved a measure increasing the minimum wage to $15 for transit and hotel workers, a particularly notable change given that Washington state already has the highest statewide minimum wage in the nation. Over the past few months, fast food workers held strikes in 130 U.S. cities demanding an increase in their wages. Most recently, in the District of Columbia, Mayor Vincent Gray signed a bill increasing the minimum wage from $8.25 to $9.50, and eventually to $11.50 by 2016.

Despite of all the energy behind these initiatives, more than half of U.S. states follow the federal minimum exactly — some of them merely by default ,as they lack any minimum wage legislation of their own. And wages vary widely across different states and different regions. For every San Francisco, Boston, or Seattle — where most of even the lowest-paid workers receive more than $10 an hour — there are cities such as El Paso, Texas; Shreveport, Louisiana; and Athens, Georgia, where thousands of workers barely earn $8 an hour.

The 2012 Occupational Employment Statistics data released by the U.S. Bureau of Labor Statistics gives a detailed picture of just how much wage rates vary across the country for workers at the 10th percentile of the wage distribution. (The 10th percentile worker earns more than 10 percent of workers but less than 90 percent of workers.)

The chart below shows the hourly wage at the 10th percentile of the wage distribution for the 20 largest American metropolitan areas by total employment. These cities are ranked by their wage rate at the 10th percentile, with the locally applicable minimum wage indicated by the dark blue overlay.

gianattasio-2014-01-27a

The above figure suggests (but, of course, does not prove) a solid correlation between the local minimum wage and the wage rate at the 10th percentile. What is interesting in the above data is that the 10th percentile wage figure for all of the above cities consistently exceeds the local minimum wage by $1 or more (the only metros where this does not hold are Chicago-Joliet-Naperville and Riverside-San Bernadino-Ontario, which are 80 cents and 85 cents ahead of their local minimum, respectively). We do not find a clustering of the wage distribution at or slightly above the local minimum wage even in metro areas with relatively high minimum wage levels, such as the D.C. and Seattle metro areas. This finding gives anecdotal support for the hypothesis that the minimum wage exerts some degree of upward pressure on local wages, instead of merely serving as a hard floor on the price of labor.

Expanding the scope of the analysis to all metro areas in the U.S., the next chart shows the 20 American metropolitan areas with the highest wage rate at the 10th percentile level.

gianattasio-2014-01-27c

*The city of San Francisco had a minimum wage of $10.24 in 2012, higher than California’s statewide minimum.

†The city of Santa Fe also has a city-specific minimum wage, which was $9.85 prior to March 1, 2012, after which the minimum wage rose to $10.29 an hour — the figure of $10.04 used here is a weighted average of these numbers over the OES sampling period. The anomalous result above, where the minimum wage exceeds the 10th percentile wage, is most likely the product of a combination of exemptions, noncompliance, and challenges inherent in the sampling methods used in the OES survey.

Among the 20 metro areas with the highest 10th percentile wage rate, seven are (primarily) in Washington state, the state with the highest minimum wage, at $9.04 in 2012. Only one of the metros listed in the top 20 followed the federal minimum (Trenton, New Jersey).

By contrast, the following chart shows the other end of the same distribution — the 20 metro areas with the lowest wage at the 10th percentile level. All of the metropolitan areas in this second figure abide by the Federal minimum wage level of $7.25.

gianattasio-2014-01-27d

Each of the above metropolitan areas is subject to its own local political and economic factors, so we should be hesitant in drawing broad conclusions from the above data. Yet this discussion does make clear one aspect of the picture — there is a high degree of variability in the wage rate of low-paid workers across the country, not only between states, but also between cities.

[Brief methodological note: When reading the charts presented above, keep in mind that the 2012 OES data measures wage and employment information garnered from surveys distributed to about 62 percent of U.S. establishments. For smaller metro areas, the OES sometimes averages data from the year(NYSE:S) past in order to reduce sampling error enough to produce a reliable estimate. Additionally, because the 2012 data is based on surveys distributed in November 2011 as well as in May 2012, some of the wage data above were collected before the reported minimum wage went into effect. At the beginning of 2012, Vermont increased its minimum wage from $8.15 to $8.46, Washington state increased its minimum wage from $8.67 to $9.04, and Oregon increased its minimum wage from $8.50 to $8.80.]

Originally written for the blog of the Center for Economic and Policy Research, which was established in 1999 to promote democratic debate on the most important economic and social issues that affect people’s lives. CEPR is committed to presenting issues in an accurate and understandable manner so that the public is better prepared to choose among various policy options. Follow CEPR on Twitter @ceprdc.

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