Qfyilyi

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 quit different, there is a single value for the minimum wage.

Theoretically, the minimum wage could be somehow correlated with cost of living. I think could work similarly to different property tax based on where you live.

Question: Why is minimum wage not correlated with cost of living or similar factor?

Short answer - because that's what the proposers of the minimum wage legislation managed to push through.

USA had a long, long history of unsuccesful attempts to enforce a minimum wage limit, amongst other economic regulations, but Supreme Court (for a time) in defence of businesses and free market ruled all those regulations unconstitutional (so-called Lohner era). Of particular relevance to your question are two of them.

First was in 1933. Roosevelt administration attempted to include minimum wages in National Industrial Recovery Act. This case did differentiate not only on regional, but also on industry branch basis (i.e., for example, agriculture and textile industry would have different minimum wages). This was ruled unconstitutional in A.L.A. Schechter Poultry Corp. v. United States, on the grounds that federal government had no power to regulate intra-state matters (which, apparently, worker wages are).

Second was in 1938, in Fair Labor Standards Act - this time, at a fixed rate. This one was upheld by 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 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 a minimum wage legislation that was held legal in 1937 in West Coast Hotel Co. v. Parrish, a year before the Fair Labor Standarts 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 cost of living.

To sum up - the minimum wage being constant and not linked to cost of living in U.S. isn't an economically-based fact, it's just the historically established legal situation.

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 it at city level (or even neighborhood level) is too complicated, and in any case it could make companies to flee the most expensive places to live. 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.

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.