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Big Minimum Wage Increase Bad for Workers

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It doesn’t make sense to ban jobs that pay a living wage, just because an employer can’t afford to pay a still higher wage. But that is what a $15 minimum wage does in regions where living costs and wages are low. There are cheap regions to live in where $11 an hour supports a decent lifestyle. If someone can afford decent food, clothing, and housing on $11 an hour, and their employer can’t afford to pay them more than $12 an hour, it is pointless and cruel to ban their job just because it pays less than $15 per hour.

But that is what a $15 minimum wage does. It bans jobs that pay less than $15 per hour, regardless of whether an individual employer and worker have a good reason for a lower hourly wage.

Virginia is now poised to join seven other left-leaning states, such as New Jersey, in imposing a $15 minimum wage. The incoming majority leader of the state senate, Richard Saslaw, D-Springfield, has introduced a bill to increase the state’s minimum wage to $15 by 2025, and then adjust it for inflation in future years. Every Democrat in the state senate has already voted for a similar bill in the past, and Democrats took control of Virginia’s legislature this November.
A high $15 minimum wage is a bad idea, especially for Virginia. It is one thing to impose a high $15 minimum wage in a state like Massachusetts or New Jersey, where the typical wage is already high, and virtually the entire state has a cost of living higher than the national average. It is quite another to impose such a high minimum wage in a state like Virginia, where many counties have low living costs and low wages to match.

No state has ever adopted a $15 minimum wage when that is above the median hourly wage in a substantial number of its counties and towns. But Virginia is poised to do just that.

A uniform statewide $15 minimum wage makes no sense in Virginia. Economically, Virginia is like two different states stitched together, that have very little in common. Its wealthy north and east are much like New Jersey. But its south and west are more like Alabama, with low living costs and wages. A house costs only a tenth as much in Southwest Virginia’s Buchanan County as it does in Northern Virginia’s Arlington County, and only a seventh as much in Southwest Virginia’s Grayson County as it does in Arlington. Not surprisingly, wages are lower in the counties that are cheaper to live in, partly because people need less to live on. Counties like Grayson, Appomattox, Mathews, Patrick, Floyd, and Northampton have median hourly wages that are less than $15 as a result.
In regions where the typical worker is paid less than $15 per hour, employers cannot possibly pay all their employees — including entry-level, unskilled workers — over $15 per hour. In such areas, employers typically don’t make more than a couple dollars per hour in profit on an employee. For example, grocery stores have a typical profit margin of between 1 percent and 3 percent per item, a small profit margin which can be wiped out by even modest wage increases. So if they are currently paying their average employee $12 per hour, they are not going to be able to raise that to $15 per hour — especially not for bottom-level, newly-hired employees who are still learning the ropes, and need help doing their job. Retail stores have small profit margins: When Venezuela imposed a large increase in its minimum wage, 40% of its stores were forced to close, because they simply could not afford to pay the higher wage.
A $15 minimum wage is popular because people wrongly believe that companies have lots of spare cash that they can spend on increased wages. The public mistakenly believes that the average corporate profit margin is a whopping 36%.

But the actual profit margin is much tinier for businesses. The average profit margin for companies that are not banks or financials is 6.9%; even if one adds in banks and financials (which pay almost all their workers over $15), it’s still only 7.9%. A 7% profit margin doesn’t give most companies enough money to raise wages for all, or even most, of their workers by more than a dollar per hour. But in a low-cost area where the average wage is below $15 per hour, that’s exactly what a $15 minimum wage requires. It requires that, even if there is no reason to think that a manufacturer will be able to pay that increased wage. It can’t, because it is competing with companies in other states or overseas that pay a lower wage. So it can’t pass the cost of a big wage increase on to its customers, which is the only way it could possibly afford the increase.

Economists say that a $15 minimum wage is a bad idea, because it will eliminate large numbers of jobs. As a think-tank notes, a “new poll of professional economists finds 74% of respondents opposing a $15 per hour minimum wage…84% believe it would have a negative impact on youth employment levels.” That included Democratic and independent economists, not just Republicans: only 12% of the economists polled were Republicans. Even the minority of economists who support a $15 minimum wage often concede that it will increase unemployment. An economist at Moody’s estimated that up to 160,000 jobs will be lost in California’s manufacturing sector alone from its gradual increase of the minimum wage to $15.

Democratic politicians argue $15 per hour is needed for a “living wage,” but this is untrue, because a family with two $12 per hour wage earners can readily support themselves, and their children to boot, in most of the country. In regions that are cheap to live in, people can live on even less, like $10 per hour. Thrifty people can make do with far less: two decades ago my wife was paid only $6 an hour working for the Embassy of Gabon in Washington, D.C., a rather expensive area, yet she managed to save a third of her monthly paycheck, by sharing a cheap, two-bedroom apartment with a friend. I saved a lot of money even while working for less than $15 per hour and living in Northern Virginia.

It’s costly for a state to raise its minimum wage a lot, because the federal government subsidizes low-wage workers to encourage employment, and takes away those subsidies when their wages rise a lot, or when they lose their jobs. That includes earned-income tax credits (EITC). EITC payments phase out as a worker’s wages rise, and totally disappear when the worker loses her job (only people with jobs qualify for EITC). When minimum wages rise, most affected workers either lose their job; or have their wages rise if they keep their job. Either way, they receive less federal money in the form of EITC. Less money in workers’ pockets means less money to spend on their families and in their communities. In low-wage areas where lots of workers receive EITC, a minimum wage increase increases the costs of employers (who have to pay higher wages to fewer workers), but doesn’t provide a corresponding benefit to workers (because increased wages to some workers are more than offset by loss of federal subsidies to workers like EITC, and by lost wages to other workers who lose their jobs). The increased cost to employers harms the local economy because employers, like workers, spend money in their community. Small business owners spend less on consumption and business investment when minimum wage hikes slash their profits. They buy less equipment, hire fewer people to do construction, and do fewer upgrades and renovations that would have provided jobs for people in their communities. Companies do not hoard their profits by burying them in the ground. Instead, they either reinvest their profits in the business, or pay it out to shareholders, who spend or reinvest that money in the economy.

Raising its own minimum wage costs a state critical tax revenue and puts it at a disadvantage compared to other states in attracting jobs. Job losses and business failures from minimum wage hikes reduce state revenue. Meanwhile, much of the benefit of the wage hike to low-income workers who manage to keep jobs at the increased minimum wage is lost due to increased federal taxes and reduced federal earned-income tax credits and food stamps, as a writer noted in the Wall Street Journal in 2016:

[T]he tax implications of going from a $10- to a $15-an-hour minimum wage … [is] very significant. For a family of four with both spouses making the minimum wage, their federal tax will increase from $4,106 to $7,219, payroll tax will increase from $2,579 to $3,869, their earned-income tax credit (EITC) will be reduced from $596 to zero … and the $2,400 food-stamp credit will be lost. Of the $20,800 increase in income in going from $10 to $15 an hour, $7,778 will be diverted to the government, which doesn’t include loss of other income-dependent government welfare programs and added costs due to the resulting inflation. Over one-third of the wage increase will flow to the [federal] government.

As a result, an economically struggling town with lots of low-wage workers tends to have less disposable income, higher prices, and less consumer purchasing power (meaning fewer retail jobs) after a minimum wage hike than before.

Economists predict that wealthy Maryland will lose up to 99,000 jobs due to its gradual increase in the minimum wage to $15. Virginia could lose far more jobs, because it has many more areas with low living costs and low wages to match, than the states that have previously adopted a $15 minimum wage.
Maryland and California, like most states to adopt a $15 minimum wage, have no counties in which the average hourly wage is below $19. Virginia has several counties with median hourly wages below $15, and many such towns. By contrast, the average hourly wage is above $20 in every county in six of the seven states with a $15 minimum wage, such as Massachusetts, New Jersey and Connecticut (in the latter state, all counties have average wages over $25 per hour). In the remaining state that recently adopted a $15 minimum wage (Illinois), only two small counties have average hourly wages below $15 (both smaller in population than any county in Virginia with wages below $15).

So even if $15 were an appropriate minimum wage for those states (whic

h it generally isn’t, as I’ve previously explained), it would be an excessive minimum wage in Virginia.

That is evident from Nevada. It is gradually raising its minimum wage to $12, not $15, because its Democratic legislature and governor recognize that a larger increase would lead to unacceptable job losses. If $12 is high enough for Nevada, it is definitely high enough for Virginia, which has far more low-wage, low-living cost areas than Nevada. Nevada has only one county with a median hourly wage below $20 per hour. By contrast, Virginia has a number of cities and counties with a median hourly wage of $15 or below. Those counties will be hit hard by a $15 minimum wage, which will force businesses to pay all their employees a rate they currently can’t afford to pay even experienced employees.

Big minimum wage hikes can also harm health and safety by pushing cash-strapped restaurants to cut corners and cut staffing. That has a negative effect on cleanliness and hygiene. This was confirmed by a 2017 study by several professors, who compared hygiene in Seattle after its minimum wage was hiked substantially, to hygiene in a city that didn’t increase its minimum wage.

This column first appeared in the Liberty Unyielding blog and Bacon’s Rebellion.
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