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.
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.
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.