How do U.S. minimum wage laws compare?

With the recent University of Washington study revealing that Seattle’s gradual increase in minimum wage has actually resulted in fewer jobs and lower total wages, the minimum wage debate has resurfaced. Should the minimum wage be increased? By how much? How fast? Should the wages be subsidized? Do the people earning minimum wage actually need an increase? There are many questions but it is important to have perspective on where the U.S. stands compared to other countries.

With the minimum wage in the U.S. at $7.25, we can compare the wage to that of other countries to understand the context. The US policy is to adopt a federal or state minimum wage depending on where one lives, Canada follows a similar structure in that the wage varies on where one lives. The average wage for the thirteen provinces is $10.50 canadian dollars which is about $7.75 U.S. dollars. The cost of living in Canada is slightly less with a consumer price index of 64.82 whereas the U.S. has a CPI of 74.08. The U.K. employs a system of four minimum wage rates at different ages. At 16-17 the minimum wage is 3.87($5.37) pounds, at 18-20 it is 5.50 pounds($7.63), at 21 and above it is 6.70 pounds($9.29). Apprenticeships under 19 receive 3.30 pounds ($4.50). So once turning 18 in the U.K. allows for a higher wage than in the U.S. but the U.K. has a higher CPI at 81.03.

Just comparison of minimum wages is not sufficient comparison because it does not determine how much value a dollar has in that economy. That is why we must examine purchasing power parity. The purchasing power parity theory states that exchange rates are in equilibrium when their purchasing power is in equilibrium. We can make the purchasing power equal by holding the CPI’s equal in each country or we can just compare proportions.

Comparison of the ratios of the wage to CPI to determine if the wages are proportional for the U.S. the ratio is 74.08/$7.25=10.22. For Canada we do 64.82/$7.75=8.36. For the U.K. the ratio is 81.03/$9.29=$8.72. The conclusion is that the U.S. is the worst off in terms of minimum wage compared to U.K. and Canada.   

Minimum wage is low in the U.S. and without in increase to adjust for inflation it reduces the purchasing power of consumers that work for minimum wage. We can further compare how Illinois stacks up against other states. States such as Louisiana, Tennessee, Mississippi, Alabama and South Carolina do not have minimum wage laws and so the federal minimum wage law of $7.25 applies. States that have minimum wages lower than the federal wage receive $7.25. Illinois along with 28 other states have minimum wages above the federal wage. Using our purchasing power parity theory we could examine what state is better off, but because CPI doesn’t vary across the state we just compare the wages side by side. Nineteen states have higher minimum wages than Illinois.  

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