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This Target executive knows what's wrong with the minimum wage

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Target is joining the long line of retailers that are upping their wages, with reports that the store will soon be setting its minimum pay at $9 per hour. The Gap raised its wages early last year, and Walmart and T.J. Maxx have followed suit this year.

The nationwide wage hike seems to represent a change in Target's thinking. Earlier this month, the company's CFO, John Mulligan, said it was "not reasonable" for the store to think about its wages in terms of one national hourly rate, as Reuters reported.

"Fixating on some single number to us, on an average number is unimportant. It’s about being competitive locally at a store level within a marketplace," he said. He also noted that Target already paid more than $9 per hour in places where wages were high, like New York and North Dakota.

So why is Target changing its tune? The decisions of Walmart and T.J. Maxx to set their own national minimums may have forced the company's hand.

But Mulligan's broader point was absolutely right, and it applies not only to Target but also to how we think about minimum wage laws nationwide. It doesn't make sense to set a uniform minimum wage across the country, and then hope state and local governments raise them as needed. It would make more sense to have a federal system in which the local minimum wage in each area is more connected to local economic conditions.

A one-size-fits-all wage doesn't work

If you've ever moved from one major city to another for a new job, you've probably experienced how different the cost of living can be in different places. The $50,000 you were making in Memphis might sound small compared with your new $70,000 salary in New York ... until you see rents in the Big Apple.

The same principle applies at the bottom of the wage scale: earning $7.25 per hour is a lot more doable in rural Idaho, for example, than in a higher-cost place like Dallas, Texas, where the minimum wage is also at the federal minimum.

It's true that many places have independently raised their own wages. San Francisco, which famously has a high cost of living, is slowly ratcheting its minimum wage up to $15 per hour. Indeed, at a time when many people agree the federal minimum is too low ($7.25 per hour, or around $15,100 annually for a full-time worker), 29 states and the District of Columbia have minimum wages above the federal minimum. And as MIT's Living Wage Project has found, the federal minimum wage simply isn't enough to live on for most American families.

But just hoping cities and states raise their minimums on their own isn't a great policy. Minimum-wage laws can get tied up in prolonged political fights in state legislatures, meaning minimum wages end up reflecting state and local politics, not state and local economies, as University of Massachusetts-Amherst economist Arindrajit Dube wrote in a 2014 paper.

As economist Jared Bernstein wrote last year, Dube's way is a better way: Dube proposed that state and local minimum wages be based at half the local median wage, a level he says is consistent with the US minimum wages of the 1960s and 1970s, as well as with standards in advanced economies.

He also advocates that lawmakers take local costs of living into account when setting those minimum wages, as the median wage and cost of living aren't perfectly correlated around the country. And finally, he advocates indexing wages to inflation, thus taking care of the problem of having to revisit the issue constantly.

What's needed: both higher and more location-specific wages

Using Dube's calculations, every state would have a minimum wage above the current federal level of $7.25 per hour.

Mississippi is the state that would have the lowest minimum wage — $7.97 per hour — under Dube's proposal. Adjust for regional prices, and it's even higher, at $8.42.

Businesses and the government, of course, have different rationales for setting their minimum wages: firms want to attract talent, while the government wants to make sure people are making enough to live on. But to achieve either requires some semblance of flexibility, and the federal government's nationwide, rarely changing minimum wage simply doesn't have that.

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