March 10, 2017

A Statewide $15 Minimum Wage Is a Bad Idea

Adam Millsap

Assistant Director, L. Charles Hilton Jr. Center for the Study of Economic Prosperity and Individual Opportunity, Florida State University

There are better ways to help low-income workers than minimum wage increases, but if people insist on a minimum wage it should be determined locally in order to mitigate its damage.

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Nationwide, there have been several organized demonstrations calling for a $15 minimum wage over the past several years. The so-called “Fight for $15” has its own website and twitter handle and the slogan has become a rallying cry for left-leaning politicians at all levels of government. Recently, both of Virginia’s Democratic gubernatorial candidates joined in and called for a statewide minimum wage increase from its current $7.25 to $15 per hour. While their hearts may be in the right place, this is a bad idea that will disproportionately harm the poorest areas of Virginia.

As I have written elsewhere, even economists who support a higher minimum wage emphasize that it should be tailored to local economic conditions. A minimum wage that is relatively large compared to the typical wages earned in an area will significantly impact the local economy since employers will have to drastically alter prices, quality or other costs in order to adjust.

A common rule of thumb proposed by many supporters of a higher minimum wage is that it should be set to roughly 50% of an area’s median wage. Any minimum wage makes it impossible for some workers to find employment, but supporters of this rule appear to be comfortable with the resulting tradeoff of less employment but higher wages for some people.

With the 50% benchmark in mind, how would a $15 minimum wage affect the people of Virginia? There are 8.3 million Virginians spread out over nearly 43,000 square miles. There are urban areas around Richmond and Washington, mountainous areas along the West Virginia border and coastal areas along the Atlantic. This geographic diversity is matched by the state’s economic diversity. Wages are higher in the areas populated by relatively high-skill workers, often in and around cities, than they are in more rural areas.

The table to the left displays the ten Virginia counties or independent cities with both the highest and lowest average weekly wages as of March 2016. The last column shows what percentage of the area’s average weekly wage a $15 minimum wage would be ($600 per 40 hour week). This is a simple analysis but it reveals the significant wage variation that exists in Virginia.

In many of the larger urban areas a $15 minimum wage would be about 50% or less of the area’s average weekly wage. Employers and workers in these areas will have a relatively easy time adjusting to a higher minimum wage, though there will still be many people who are adversely affected—those who are unable to produce enough output to justify the mandated wage.

In the bottom ten areas, however, a $15 minimum wage would cause much larger problems. A $15 wage is higher than the current average wage in each area, which means a significant portion of the workers and employers in these areas would be covered by such a large increase. In fact, since the average wage is probably higher than the median wage, more than 50% of the workers in these areas would likely be impacted.

Some may think this is a good thing, since it means more people will get raises. But the more people a minimum wage covers, the greater the effect on the overall labor market. Employers will adjust to the increase in costs along other margins, such as charging higher prices, hiring more productive workers to justify the higher wage or by cost cutting in other areas. Some may choose not to go forward with a planned expansion or go out of business altogether.

Of course, any minimum wage increase is going to be phased in, so wages will likely rise in these areas before its fully implemented, but it seems naïve to believe that wages will rise by enough to eliminate any concerns.

The employment column in the chart above is also interesting. Many minimum wage advocates are from urban areas and want to help the low-wage workers they interact with on a regular basis—the Starbucks barista, a dry cleaning employee they see regularly or the cook at their favorite restaurant. Using employment as a proxy for population, these areas are vastly more populated and thus more politically influential than the rural areas that will ultimately be hit the hardest by a large minimum wage increase.

Good intentions often have disastrous effects, and wealthy urban dwellers who insist on a higher statewide minimum wage might not even understand the economic harm such a policy would inflict on their fellow Virginians.

Politicians and others who push for a higher minimum wage often think they are helping people, but there are costs, too, and these costs will be particularly high in poorer, rural areas. Wages don’t determine a worker’s productivity, they reflect it, and when government haphazardly interferes with the labor market it causes serious problems.

There are better ways to help low-income workers than minimum wage increases, but if people insist on a minimum wage it should be determined locally in order to mitigate its damage.