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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?

kloddant
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Alexei
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    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 '19 at 05:44
  • 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 '19 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 '19 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 '19 at 19:39
  • Minimum wage is not necessarily through legislation: "Many countries, such as Norway, Sweden, Finland, Denmark, Germany, Austria, Italy, and Cyprus have no minimum wage laws, but rely on employer groups and trade unions to set minimum earnings through collective bargaining." – Peter Mortensen Jan 11 '19 at 07:13
  • How would you define "cost of living"? This can depend huuugely on your life style. – mathreadler Jan 11 '19 at 09:01
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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 '19 at 16:51

8 Answers8

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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.

Peter Mortensen
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Danila Smirnov
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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 09 '19 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 '19 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 '19 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 '19 at 03:20
  • @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 '19 at 05:06
  • @DanilaSmirnov not really true. The top 9 European countries are larger than the largest US state. The average comes down because there are many really small countries. But despite the EU, the European countries are still much more different than the US states. And don't forget that the larger EU countries have their own states (e.g. Germany has 16 states, France has 18 regions (5 of which are overseas), Italy has 20 regions, and Great Britain even has 4 almost-countries). Too simplistic to compare EU and USA directly. – Tom Jan 11 '19 at 05:12
  • @Tom You are wrong. Largest EU country is France at 552k km^2, largest non-EU country - Ukraine at 604k km^2 (not including european part of Russia, or Turkey, which is situated mostly in Asia). Texas is the second largest state in US, and its area is 677k km^2. Third largest state - California - would too make it in top 6 in Europe. Besides, I did mention China and Russia in my previous comment - both those countries have both regional subdivisions the size of largest european countries and regional adjustment to wages. – Danila Smirnov Jan 11 '19 at 05:29
  • And re: european countries having subdivisions of their own - US states have counties, Russia's oblasts have districts. The way countries manage their population is not that different, so if we have roughly similar administrative units - we can compare how they are governed. – Danila Smirnov Jan 11 '19 at 05:47
  • @DanilaSmirnov - I wasn't aware that square kilometers are the deciding factor for minimum wage questions. I was under the false impression that population size would somehow matter for a question about employment and work. I stand corrected. I'm looking forward to learning about the minimum wage laws of Antarctica (14 mio. km^2). – Tom Jan 11 '19 at 09:34
  • @Tom Sorry for having understood you incorrectly. I direct you to China and India then - provinces with population of 80+ million people surely are comparable to european countries? – Danila Smirnov Jan 11 '19 at 09:54
  • @DanilaSmirnov - surely they are. But I know nothing about the minimum wage situation in China. – Tom Jan 11 '19 at 09:55
  • @Tom both India and China have minimum wages calculated on per-region basis. – Danila Smirnov Jan 11 '19 at 10:02
  • Let us continue this discussion in chat. – Danila Smirnov Jan 11 '19 at 14:12
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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.

Rekesoft
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    "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 https://www.gsa.gov/travel/plan-book/per-diem-rates – BurnsBA Jan 09 '19 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: https://www.nytimes.com/2018/10/22/business/economy/seattle-minimum-wage-study.html – BurnsBA Jan 09 '19 at 14:45
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    I've added some text to address both spot-on comments. ;) – Rekesoft Jan 09 '19 at 15:03
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    If companies flee the most expensive places to live that would decrease the price to live in those areas and increase it elsewhere - I'd say that is a win... – Reasonably Against Genocide Jan 09 '19 at 21:50
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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 09 '19 at 23:59
  • @BurnsBA The US Government does tie federal and military pay to the area, called the locality pay. This differs from the per diem/M&IE rates, because the per diem rates are based on surveys of actual hotel and food costs and vary by month (Florida during spring break). Some tourist traps are cheap to actually live in (Las Vegas, for example). – user71659 Jan 10 '19 at 01:29
  • @BurnsBA, first, that list isn't the "largest cities", it's "places that people are likely to travel to on business that have costs that vary significantly from normal". (For example, West Yellowstone, MT, is a flyspeck of a town (population 1300) with a significant tourist trade.) Second, there are a lot of places not on the list (eg. the entire state of North Dakota). – Mark Jan 10 '19 at 01:49
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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 '19 at 08:29
  • @Clay07g even an in-town move, with ample support from a local network (ex: folks with pickup trucks), a move can easily wipe out 6 months or more of savings and really mess up the food budget because of the difficulties of transporting punishables. Any further and you have to give away/donate/discard a bunch of stuff that'll set you back even further, just to make it possible. – Morgen Jan 10 '19 at 08:31
  • @Clay07g: In US (which people seem to be assuming), as of just-completed-and-soon-to-file 2018, moving cost is no longer deductible, except for military on Permanent Change of Station orders. And similarly employer reimbursement for moving (which I doubt many minimum-wage get) is no longer tax-free. These are among the many changes by TCJA in Dec. 2017. (Although if you donate stuff as Morgen says, to a recognized charity(ies), that is now deductible to 60% AGI versus 50% previously. FWTW.) – dave_thompson_085 Jan 10 '19 at 13:04
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    @Clay07g "Moving isn't that expensive, as long as it isn't." – Azor Ahai -him- Jan 10 '19 at 23:00
  • @Clay07g Doing the monthly food run is much different than trying to pack up everything in your fridge and freezer and get it to the new place and back into the appropriate storage. Spoilage isn't linear, so food can tolerate the journey much better when completely fresh than when it's already been in the fridge for a while. Ideally, you'd let the food stores dwindle to next to nothing before a move, but that isn't always possible. – Morgen Jan 11 '19 at 08:02
  • @Clay07g Hold up there, I've moved 9 times since I moved out, both in town, out of state, and coast-to-coast (twice). During all but the last 3, our family was solidly low-income. When I do speculation, I qualify that upfront. You can try and generalize based on your college grocery runs, but that's not all that relevant to actually moving. The one indulging in speculation here sure isn't me. – Morgen Jan 11 '19 at 20:42
  • @Clay07g You need to chill. The only actual experience you've referenced was your grocery runs, so that's what I've been addressing. I've assumed exactly nothing about you, a courtesy you have not been returning. I do not come here for this. Congratulations on being the loudest voice in an empty room, and may you enjoy your newfound space to spew venom into the void. – Morgen Jan 12 '19 at 06:29
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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.

Azor Ahai -him-
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    Just because a state or municipality is setting a minimum wage doesn't mean it is linked to cost of living. – DJClayworth Jan 09 '19 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 -him- Jan 09 '19 at 16:23
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    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 '19 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 -him- Jan 11 '19 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 '19 at 17:28
  • @Barmar Well, yes, that goes for basically any political process ... – Azor Ahai -him- Jan 11 '19 at 17:35
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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.

DJClayworth
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  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.

knallfrosch
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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 09 '19 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 09 '19 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 09 '19 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 '19 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 '19 at 11:35
  • @gerrit Not only on that, but being from a rural area I can attest that most young people want to go live in big cities in order to enjoy the services they provide, and the better job market. The mere fact you do not move means that you value a job more than living poorly in a comfy rural area, which means that your consider your current living conditions as better. – Shautieh Jan 11 '19 at 11:47
  • @Shautieh Young people move from a 4-bedroom house to a shared autoclave surrounded by toxic air, yet insist living conditions improve, yes, there are many of those. Your point on moving is incorrect. I would gladly take a big pay cut if it means I could live in a more natural area, but my job applications in cities have been successful whereas my job applications in rural areas have not. It's not possible to move somewhere without having a job there — landlords won't sign a contract. I live in cities, not by choice, but by economic necessity. We can't really choose where we live. – gerrit Jan 11 '19 at 12:59
  • @gerrit I think you missed the point. If you can't make it there because there is no job for you, then it implies that living condition are better here than there for you. – Shautieh Jan 11 '19 at 14:29
  • @Shautieh Which is why I said that this is true if you define living conditions by the availability of jobs (only). Many people would not choose cities if they could live anywhere, many people relocate after they retire, but I think it's shallow and circular to define living conditions as where one can make a living only. – gerrit Jan 11 '19 at 14:41
  • @gerrit You could equally well say you have to live in a rural area because it's better and you can't get better air in the city even though you'd rather live in the city which has better jobs. In any case it's better to live in the city and that's why it's costlier. You don't need to give people a higher wage because they're like "I bought an expensive house so I need it" any more than if they said "I bought an expensive car so I need it". You could've moved somewhere else, in the same way you could've bought a cheaper car. – user84614 Oct 16 '23 at 15:40
  • @user84614 Certainly people who are particularly sensitive to noise or air pollution could say that. It's not "better in any case to live in the city". Some people prefer cities, others prefer suburbs, others rural areas. And you do need to give people a high enough wage such that they can afford to live in commuting distance from where they work. Maybe they could have moved somewhere else, but possibly while finding a lesser-paid job. Likewise, if someone works in a place only reachable by 4WD then employers will have to pay enough so that workers can afford the transportation to get there. – gerrit Oct 16 '23 at 16:05
  • @gerrit "Maybe they could have moved somewhere else, but possibly while finding a lesser-paid job." And that's why they're compensated with a lower cost of living. – user84614 Oct 16 '23 at 16:13
  • @gerrit "Certainly people who are particularly sensitive to noise or air pollution could say that. It's not "better in any case to live in the city". Some people prefer cities, others" I'm saying that in any case they live in a rural area you can infer it's better for them (not trying to analyze the various factors that might be the case like air pollution etc). By "in any case it's better to live in a city" I meant that if you choose to live in a city it's because the living conditions are better in the city. – user84614 Oct 16 '23 at 16:16
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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.

Mathew Paxinos
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    I think this question asks primarily about the situation in the U.S. – JJJ Jan 10 '19 at 02:41
  • 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 supports Monica Jan 10 '19 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. https://www.fairwork.gov.au/how-we-will-help/templates-and-guides/fact-sheets/minimum-workplace-entitlements/modern-awards –  Jan 11 '19 at 05:35
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People sometimes talk about cost-of-living adjustments as a simple neutralization or normalization. Even economists make this mistake, but it's not. Living somewhere expensive is more valuable than living somewhere cheap. A dollar in an expensive place is worth the same as a dollar in a less expensive place. They exist within the same system. If you find the cost of living too unaffordable you should move somewhere cheaper since that means there's people who want to live there badly enough they don't find it unaffordable. (Of course how badly they want it is multiplied by how much their want is worth.) This would help push people into communities that have cheaper rents and that thus presumably need people/workers to move there desperately. It would be wrong and misguided for the government to interrupt that price signal.

This is more like the why hasn't it come through academia through the think tanks through the senators to be pushed into policy answer, although it is also an intuition among people that $15 is worth the same anywhere and you can always move to somewhere else in the US if necessary, connecting to the idea of it being the bare necessity for survival. Unrelated, another answer is that politicians are incentivized to push simple, easily communicatable solutions. (Fight for 15 fits on the poster board and then you get 15 in the law.) It would also seem to be duplicitous and seem to usurp the authority of cities to set their own wages (which they do through their own debates and campaigns, making a standardized calculation seem bureaucratic). There is no 'objective' cost of living and then you get the question of how finely to subdivide.

user84614
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    This does not answer the question on why it is not used. Also it is not always possible for someone to move to an area with a cheaper cost of living as it is meaningless to move if you can't get a job there to support you. In some areas of the world people end up with multi hour commutes to get to work due to cost of living issues. – Joe W Oct 16 '23 at 15:37
  • @Joe W It does answer why it's not used. Concrete ex. it gives is "This would help push people into communities that have cheaper rents and that thus presumably need people/workers to move there". "it is not always possible for someone to move to an area with a cheaper cost of living as it is meaningless to move if you can't get a job there to support you." That's why the cost of living is more expensive. They're buying the opportunity to get a job by living there and depriving others of the opportunity. – user84614 Oct 16 '23 at 15:46
  • Just because you point out the cost of living differs based on where in the world you live doesn't mean that is why it can't be used. There are plenty of systems that take into account the differences in costs of living in how much people get paid. A quick example of this is the US military basic allowance for housing which will be adjusted based on where you live and how much it costs to live there. Meaning that if you are in an expensive area such as California you will get paid more then if you are in a cheap area such as Nebraska. – Joe W Oct 16 '23 at 15:55
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    If you are suggesting that the workers for basic low paying jobs should move to someplace cheaper who do you expect are going to work those basic low paying jobs? Moving isn't something that is cheap or easy to do for most people. – Joe W Oct 16 '23 at 15:56
  • You now seem to be making a claim that people think $15 is the same everywhere but there no evidence to back up that claim. – Joe W Oct 16 '23 at 16:06
  • @Joe W "who do you expect are going to work those basic low paying jobs" The wages would rise inasmuch as they are worth it making the cost of living affordable. And yes moving isn't cheap but that is a cost that would be factored by the free market as well. /

    In response to the US military basic allowance, yes, it can be implemented, but the fact that it really ought not to be implemented explains why it hasn't been a 'flaw' pointed out by economists and think tanks with a concerted movement behind pushing the move to a cost of living adjustment.

     – user84614 Oct 16 '23 at 16:07
  • @Joe W I guess I mean that with $15 you can always choose to move to location A or location B regardless of whether you live at location A (cheap) or B (expensive). A person at location A might choose to move to B but don't need to be paid less if they don't – user84614 Oct 16 '23 at 16:10
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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.

Felipe Acuña Gonzalez
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