The United States Can Afford a Higher Minimum Wage

There is evidence that the United States can stomach a raise in the federal minimum wage. Even some of the U.S. states which require higher minimum wages may have room for some more.

The minimum wage remains a contentious issue in the United States. The verdict is out on whether a raise as mandated by some larger U.S. cities will do more harm through lost jobs than good through increased income.

However, there is some consensus among economists about a tipping point, that is at what level does an increase of the minimum wage have a negative impact. Research suggests that once the minimum wage creeps up on 50% of the average wage, small businesses in particular will reduce staff.

If that is true, it’s time to check how much room some countries have as they play around with the minimum wage. Based on figures for 31 OECD members, the club’s average minimum wage is an adjusted 51% of the average wages of full time workers. The ratio ranges from 35% for the United States to 76% in Turkey. This excludes the two outliers Costa Rica with 79% and Colombia with 86%. Interestingly, half of the examined 31 OECD countries seem to follow the economists’ suggestion to keep that ratio at or below 50%.

There are several factors that may suggest the United States in particular has room to maneuver when it comes to minimum wage increases. First, at 35%, the share could theoretically rise by 15 points, which would mean, the federal minimum wage could rise from the current $9 to $12.87.

Various states or cities require higher minimum rates with Massachusetts and Washington state requiring $11. The capital Washington, DC requires the highest minimum wage of $11.50. If the $12.87 are indication for wiggle room then even Washington, DC can raise the minimum.

There is additional evidence that the United States could currently stomach a rise. How does the United States compare to the biggest OECD economies for which consistent data are available? Germany introduced a minimum wage only in 2015 which is why it was excluded from the analysis.

In fact, between 2000 and 2016, the U.S. ratio of the minimum wage as a share of the average hourly wage decreased by 2.5% from 36% to 35%. Over the period, it was as low as 31% in 2007. This compares to an increase of almost 18% for the adjusted OECD average.

Interestingly, the United States is not only the country with the lowest ratio. It is also the only large economy whose ratio dropped over the reviewed period.

There are other countries with a decreasing ratio including Ireland, The Netherlands, Australia and Belgium. However, as of 2016, their average ratio of 48% is close to the 50% ceiling and thus significantly above the U.S. ratio.

So, room to grow? Well, if the 50% ratio indeed represents a tipping point and compared to the other large OECD economies then yes.

OECD, The Economist, U.S. Labor Department