A recent NBER working paper by Arindrajit Dube & Attila Lindner has been published looking at city-sized minimum wage laws, examining the recent trend of individual municipalities in the US setting their own wage floors. Perhaps surprisingly they find that these hyper-local regulations operate in a similar way to their state and federal level counterparts - lifting wages with minimal impacts on employment.
In Australia, however, our laws are set nationally and don’t even vary by state a perennial feature of the US labour market! Why not?
There are two arguments against state-based minimum wages.
The first is the added complexity that occurs when businesses have to deal with employees across several different states. This concern in Australia is amplified as we already have a complex set of awards that differ by occupation and industry.
The second is the risk that towns on the border between two different wage regimes might see their labour markets distorted as businesses just across the border that compete with each other may be forced to pay different wages.
These concerns are overrated. Relatively few businesses are large enough to employ workers across different states and those that do are more than capable of handling the complexity of different state regulations. The risk to cross border economies is also a minor worry as Australia has relatively few of them and those that do exist are strewn between the larger, less volatile state economies on the eastern seaboard. The large & diverse economies of NSW and Victoria generally move in tandem and are unlikely to need substantially different minimum wages.
The benefits of stated-based minimum wage however could be large. The states’ labour markets have at times diverged by substantial amounts. During the mining boom a gap of more than 3 percentage points opened up between WA and Tasmania - the difference between boom times and a bone crunching recession. Even today average weekly earnings are 23% higher in WA than in Tasmania.
Regardless of your view on whether the minimum wage today is too high or too low, the idea that it is optimal for every state (& terrority) to have the same minimum at all times strains credulity.
How would this work in practice? Well just as a farrago of relevant parties make submissions on the annual increase in National Minimum Wage. State based groups could make a submission on whether their state should have a slightly larger, or slightly smaller, increase than the national average.
This would mean minimum wages would rise in states with a lower rate of unemployment and strong aggregate wage growth, grow slower in the states that weren’t so lucky and lead to a flock of labour economists heading to Albury-Wodonga so they can measure the resulting differences.