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The Oregon Trail Ends in Unemployment

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The Oregon Trail Ends in Unemployment

February 22, 2016

After a tumultuous legislative session involving protests and sit-ins at the state capitol, Oregon’s legislature passed a plan raising Oregon’s minimum wage. The plan heads to the desk of Governor Kate Brown, who is expected to sign it. When the increases are fully phased in, Oregon will have the highest statewide minimum wage in the country.

The plan is unique in that it does not raise minimum wages equally across the state, with some places receiving greater increases than others. The breakdown of minimum wages by county is shown on the map below.

On July 1, 2017, the Portland area (in red) will have a minimum wage of $11.25 per hour. The more urban, coastal counties (in orange) will have a wage floor of $10.25, while the more rural, interior counties (in pink) will have $10. The current minimum wage in Oregon is $9.25. Each year thereafter until 2022, minimum wages in each of the three regions will rise.

The logic behind this is that a dollar in one place may not be worth a dollar somewhere else. Wages and prices are generally higher in urban centers than rural places. Therefore, a $10 nominal minimum wage may be worth $12 in one area and $8 in another. Raising the minimum wage uniformly would concentrate the resulting job losses in some areas, while others may feel relatively little pain.

If policymakers are compelled to raise the minimum wage, there is a strong case for doing so unevenly. This seems to be what Oregonian legislators had in mind.

Using the Bureau of Economic Analysis’ Regional Purchasing Power index, we can calculate the real value of the proposed minimum wage in the different regions of Oregon.

In 2017, nominal minimum wages in Oregon will range from $11.25 in Portland to $10 in more rural areas, a 13 percent difference. However, real minimum wages—those adjusted for purchasing power—will vary by only 7 percent. Similarly, in 2022 Oregon’s minimum wages will vary by 18 percent in nominal terms, but just 9 percent in real terms.

The real problem is not that Oregon’s minimum wages vary relative to each other, but that they vary relative to the rest of the United States. According to the purchasing power index, $1.00 in Oregon is worth about $1.01 in the rest of the country—in other words, roughly average. While higher minimum wages would be less unreasonable in a place such as San Francisco (where a dollar is worth just 83 cents), a sensible public policy would expect Oregon’s minimum wage to be right in line with the national average. Instead, it is one of the highest in the country.

A rule of thumb, proposed by Professor Arindrajit Dube of the University of Massachusetts-Amherst, is that the minimum wage should not exceed 50 percent of the median wage in a locality. (I would argue for a lower threshold, but let us say 50 percent for the sake of argument.) Generously assuming 2 percent annual wage growth, in 2017 every single locality in Oregon will be above that limit, with rural areas getting hit the hardest.

This policy will have real consequences. Many people, especially the young, will be shut out of job opportunities as employers find they can no longer afford to hire them. While some Beaver Staters may get a raise, for too many the Oregon Trail will end in disappointment.

 

Preston Cooper is a Policy Analyst at the Manhattan Institute. You can follow him on Twitter here.

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