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A $15 minimum wage will excessively harm California’s poorest counties

by Adam Millsap on March 30, 2016

in Economic Policy, Minimum Wage, Regulation, Unemployment

Lawmakers in California are thinking about increasing the state minimum wage to $15 per hour by 2022. If it occurs it will be the latest in a series of increases in the minimum wage across the country, both at the city and state level.

Increases in the minimum wage make it difficult for low-skill workers to find employment since the mandated wage is often higher than the value many of these workers can provide to their employers. Companies won’t stay in business long if they are forced to pay a worker $15 per hour who only produces $12 worth of goods and services per hour. Statewide increases may harm the job prospects of low-skill workers more than citywide increases since they aren’t adjusted to local labor market conditions.

California is a huge state, covering nearly 164,000 square miles, and contains 58 counties and 482 municipalities. Each of these counties and cities has their own local labor market that is based on local conditions. A statewide minimum wage ignores these local conditions and imposes the same mandated price floor on employers and workers across the state. In areas with low wages in general, a $15 minimum wage may affect nearly every worker, while in areas with high wages the adverse effects of a $15 minimum wage will be moderated. As explained in the NY Times:

“San Francisco and San Jose, both high-wage cities that have benefited from the tech boom, are likely to weather the increase without so much as a ripple. The negative consequences of the minimum wage increase in Los Angeles and San Diego — large cities where wages are lower — are likely to be more pronounced, though they could remain modest on balance.

But in lower-wage, inland cities like Bakersfield and Fresno, the effects could play out in much less predictable ways. That’s because the rise of the minimum wage to $15 over the next six years would push the wage floor much closer to the expected pay for a worker in the middle of the wage scale, affecting a much higher proportion of employees and employers there than in high-wage cities.”

To put some numbers to this idea, I used BLS weekly wage data from Dec. of 2014 to create a ratio for each of California’s counties that consists of the weekly wage of a $15 per hour job (40 x $15 = $600) divided by the average weekly wage of each county. The three counties with the lowest ratio and the three counties with the highest ratio are in the table below, with the ratio depicted as a percentage in the 4th column.

CA county weekly min wage ratio

The counties with the lowest ratios are San Mateo, Santa Clara, and San Francisco County. These are all high-wage counties located on the coast and contain the cities of San Jose and San Francisco. As an example, a $600 weekly wage is equal to 27.7% of the average weekly wage in San Mateo County.

The three counties with the highest ratios are Trinity, Lake, and Mariposa County. These are more rural counties that are located inland. Trinity and Lake are north of San Francisco while Mariposa County is located to the east of San Francisco. In Mariposa County, a $600 weekly wage would be equal to 92.6% of the avg. weekly wage in that county as Dec. 2014. The data shown in the table reveal the vastly different local labor market conditions that exist in California.

The price of non-tradeable goods like restaurant meals, haircuts, automotive repair, etc. are largely based on local land and labor costs and the willingness to pay of the local population. For example, a nice restaurant in San Francisco can charge $95 for a steak because the residents of San Francisco have a high willingness to pay for such meals as a result of their high incomes.

Selling a luxury product like a high-quality steak also makes it relatively easier to absorb a cost increase that comes from a higher minimum wage; restaurant workers are already making relatively more in wealthier areas and passing along the cost increase in the form of higher prices will have a small effect on sales if consumers of steak aren’t very sensitive to price.

But in Mariposa County, where the avg. weekly wage is only $648, a restaurant would have a hard time attracting customers if they charged similar prices. A diner in Mariposa County that sells hamburgers is probably not paying its workers much more than the minimum wage, so an increase to $15 per hour is going to drastically affect the owner’s costs. Additionally, consumers of hamburgers may be more price-sensitive than consumers of steak, making it more difficult to pass along cost increases.

Yet despite these differences, both the 5-star steakhouse in San Francisco and the mom-and-pop diner in Mariposa County are going to be bound by the same minimum wage if California passes this law.

In the table below I calculate what the minimum wage would have to be in San Mateo, Santa Clara, and San Francisco County to be on par with a $15 minimum in Mariposa County.

CA comparable min wage

If the minimum wage was 92.6% of the average wage in San Mateo it would be equal to $50.14. Using the ratio from a more developed but still lower-wage area – Kern County, where Bakersfield is located – the minimum wage would need to be $37.20 in San Mateo. Does anyone really believe that a $50 or $37 minimum wage in San Mateo wouldn’t cause a drastic decline in employment or a large increase in prices in that county?

If California’s lawmakers insist on implementing a minimum wage increase they should adjust it so that it doesn’t disproportionately affect workers in poorer, rural areas. But of course this is unlikely to happen; I doubt that the voters of San Mateo, Santa Clara, and San Francisco County will be as accepting of a $37 + minimum wage as they are of a $15 minimum wage that won’t directly affect many of them.

A minimum wage of any amount is going to harm some workers by preventing them from getting a job. But a minimum wage that ignores local labor market conditions will cause relatively more damage in poorer areas that are already struggling, and policy makers who ignore this reality are excessively harming the workers in these areas.

  • Aaron

    I don’t think equating a $15 minimum wage in Mariposa to a $50 minimum wage in San Mateo is a fair comparison. Mariposa county has a rural, agricultural economy. The workers in these markets are naturally lower paid then the heavily tech oriented economy in San Mateo. Averaging all the salaries simply doesn’t do this distinction justice because I’m willing the bet the wage distribution in Mariposa is much flatter compared to San Mateo. Where you have farmers in Mariposa you have software engineers in San Mateo. Both markets DO have waiters, barbers, etc. And people with these occupations certainly earn more in San Mateo than in Mariposa. But it’s not anywhere near triple. Where workers in Mariposa would need a 30-50% bump to get to a $15 dollar minimum wage, similar workers in San Mateo would need more like a 250% bump to get to a $50 minimum wage.

    • Adam

      Sure, but the cost of living is much higher in San Mateo too. If the minimum wage hike is supposed to reduce inequality and provide people with a living wage, why not adjust it to local conditions? I don’t see why Mariposa can support a minimum wage that on paper drastically reduces the gap between the lowest-skilled and avg. skilled worker but San Mateo can’t. Don’t the low-skilled workers in San Mateo deserve the same real increase in wages that is supposedly going to accrue to the workers in Mariposa?

      On paper, income inequality is going to be barely impacted in San Mateo while being drastically reduced in Mariposa. If reducing inequality and providing a living wage is the goal of this legislation, which it sounds like it is, only some counties are going to see this, and these are the poorest counties.

      Or perhaps, as I suspect, the workers in the poorest counties will find themselves with few employment options since many of them are incapable of producing $15 worth of value in these rural, agricultural counties. This is a good law if the goal is to decimate rural counties and incentivize everyone to move to more productive urban places.

      If only the NIBMYIism of the coastal elite didn’t prevent building the goal might actually be achieved. But since housing prices are so high in San Mateo and other places my guess is that many of the poor will remain in their jobless rural counties, with little hope of improving their lives.

      • Aaron

        Sure, I agree. I’ve always been in favor of abolishing the minimum wage, and there’s little doubt in my mind that this $15 hike will be a net negative. And clearly there will be more damage done in Mariposa than in San Mateo. But I think it’s exaggerating to say that a $15 minimum wage in Mariposa would be as damaging as a $50 minimum wage in San Mateo. There’s a big difference between the restaurant in Mariposa who has to start paying its busboy $15 an hour instead of $10 and the one in San Mateo who would have to start paying its busboy $50 an hour instead of $17.

        • Adam

          There may be a difference but I think the comparison is relevant. Unemployment in Mariposa is 8.6% as of Feb. 2016 and 3% in San Mateo. The avg. wage in San Mateo would be even lower if the unemployed – who are likely the least skilled – were hired. So a $15 min wage is likely even more damaging than it appears since it is so high relative to avg. productivity.

          This is related to another point: What jobs in Mariposa have already been eliminated that still exist in San Mateo? That there are busboys making 12 – $17 per hour in San Mateo highlights the fact that the current min. wage is less damaging there and has not eliminated jobs that are likely already gone in Mariposa. A $30 min. wage would probably eliminate those jobs in San Mateo.

          The type of job and worker making up a min. wage job in San Mateo at $47 per hour would likely be different than the type of worker and job making up a $15 min. wage job in Mariposa, but I think that the total damage caused by such min. wages in terms of employment and employment prospects is not really that different across the counties.

          And I concede that $47 may be high, but $30 to $35 doesn’t seem like a bad comparison.

          BTW, I appreciate your comments and thanks for reading.

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