Thinking About Minimum Wage Increases in a Globalized Economy

Thinking About Minimum Wage Increases in a Globalized Economy

There isn’t a country on earth whose citizens don’t want to increase their standard of living. For many, that could mean a bigger house or enough money to retire by 65; for others, it could mean simply clean water or long-term housing.

The process of determining exactly how to raise those living standards, however, has put those on the lower end of the earnings spectrum in the middle of an intense global battle over what role governments should play in making it happen. One particular aspect of that battle has been raging in Europe and is now landing on American shores: the battle over the minimum wage.

min wage infographic
Hourly minimum wage around the world, actual and adjusted for purchasing power

There are now movements to raise the minimum wage in parts of the United States and in some European countries. The U.S. minimum wage has not kept up with inflation and for many families living on the minimum wage, an increase would yield immediate benefits. But the people advocating minimum wage increases should remember one thing: we live in a global economy.

Thanks to advances in shipping and communications, companies don’t always have to hire from the local labor pool or buy locally. In the 1970s and 1980s, the goods markets became global, with products like cars and microchips arriving from Japan and Europe. The services market soon followed. Today, human resources, accounting and tax management, legal work, and a myriad of other essential tasks can be done by people in the next town, the next state or the next country. Baton Rouge or Bangalore, take your pick.

For employers, that means looking beyond the cost of the local labor pool. It means taking a global view of labor costs. In the United States, the minimum wage is $7.25 an hour; in India, it’s about $1.90. That’s almost a 300 percent difference.

That wide gap isn’t just America’s problem. Its $7.25 minimum wage is small potatoes when you consider the $25-an-hour plan that Switzerland’s legislators just put to voters (they turned it down), or the $11.60 an hour that is the rule in Germany. Britain’s is $10.50. Australia’s is $15.89.

In the United States, many states have long mandated a minimum wage above $7.25, and many are currently working to raise the wage even higher. Washington, D.C., for example, has the highest minimum wage in the United States — $9.50 an hour, according to the Department of Labor — but just last month Seattle’s city council voted to raise its minimum wage to $15 an hour over three years, and San Francisco may match that. Massachusetts recently passed a minimum wage of $11 an hour that takes effect in 2017. And federal contractors are now subject to a new executive order, signed by President Barack Obama on February 12, 2014, that requires them to pay their workers at least $10.10 an hour beginning January 2015.

Though it’s true that some workers will bring home more money if the minimum wage rises, it’s also true that companies that have a legal and moral obligation to act in the best interests of their owners can’t really get away with ignoring rising labor costs. So when labor costs are high in their local area, companies are going to look for labor or imports from less expensive areas, domestically or internationally.

Worse is what happens over time. If employers move jobs and companies leave a high-cost town to move to lower-cost towns, what’s left in the high-cost town? Some services must be delivered locally. Doctors, criminal lawyers, and mayors are examples. But outnumbering them will be a sea of fast-food workers and cashiers. The skilled, mid-level “middle-class” jobs are the ones that tend to move to low-cost regions.

Make no mistake, those “barista economies” may not appear tomorrow. But they have already begun to emerge in some cities. And that’s exactly what political leaders may be encouraging by raising the minimum wage.