Virginia Likely to Impose Excessive Minimum Wage

Beneficiaries… or victims… of a $15 minimum wage?

by Hans Bader

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  MassachusettsNew 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 (which 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 an average hourly wage below $20 per hour (it’s about $19 per hour in Lincoln County). 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.

Hans Bader, a former Competitive Enterprise Institute scholar, is an attorney living in Northern Virginia. This column first appeared in the Liberty Unyielding blog.

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16 responses to “Virginia Likely to Impose Excessive Minimum Wage”

  1. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    Mr. Bader needs to take a deep breath and relax. The sky is not going to fall. Saslaw’s bill raises the minimum wage to $10 next year and then by a $1 per year for the next five years. So all those companies he is worried about will not have to start paying $15 next year.

  2. Here’s one example of how a $15 minimum wage could play out with my own business. I operate a small startup operating on a really tight budget. My hope is to eventually have two types of employees: highly trained part-time employees well above $15/hour, and low-skill part-time employees around minimum wage. The former would consist of adults with experience who are looking for a side gig, and the latter would consist of high-school students looking to gain experience and a bit of gas money. If the state forces me to pay the high-school kids $15/hr, I either have to 1) jack up the cost of my services, which will definitely hurt business, 2) decrease the pay for my skilled employees, which is going to impact the quality of people I can recruit, 3) cut hours, or earn 4) less profit (and as a startup, there’s not much of that). Either way, I don’t see who wins. Money isn’t free, people. So I’ll tell you what I’ll do: I won’t be hiring those low-skill workers. I’ll do the grunt work myself, or ask the high-skilled workers to help with that (and maybe pay them a little bit more, but not $15/hr more). Maybe over time, the costs of goods and services will go up to compensate for higher base wages, but how does that really help anyone either? I mean, what’s the point of doubling wages if rents, food, fuel, taxes, etc. double, as well? The government really needs to minimize its involvement in markets. Anyone who thinks a $15/hr minimum wage is going to bring wealth equity is a fool.

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      The current law does not require you to pay high-school students minimum wage and the introduced bills would not require you to pay $10 an hour or eventually $15 per hour to high school students. The law exempts students under 18 years old who are working less than 20 hours per week from the minimum wage requirements.

  3. Steve Haner Avatar
    Steve Haner

    I really don’t like those ordering kiosks in fast food restaurants, but I guess I need to get used to them….Maybe I’ll start seeing them in slightly higher end establishments, as well. A robot waiter coming to my table….

    Hey, elections have consequences. This is something the Democrats promised to excite their voters, and now they have to deliver. What was the GOP message about economic opportunity or growing VA’s economy or helping the working class? Didn’t hear one. Like many people with no real world experience, mostly government work, Dick doesn’t get what the outcome will be, but clearly if government makes something more expensive (unskilled labor) there will be less of it. And there will be an inflationary up pressure on skilled jobs, which might be paying $17-18 per hour now to start, but will have to maintain some gap with the minimum wage going forward.

    I’d be interested in seeing how VA will compare with its immediate neighbors, as this could move jobs back and forth across borders. But the $7.25 has been stuck in place a long time.

    1. How about expediting the growth of AI?

    2. paulkra77 Avatar

      Automation and robots will make a very positive effect on our economy. More engineers to design robots, more high paid IT workers to update software, more skilled workers to fix robots when they are broken, more professors to educate more engineers and skilled workers, more bankers to give more loans to more students…, more education and new economy.

      100 years ago we would need 1000 of workers with shovels to build a small road, now we have machines and few workers are needed for roads but more for building machines. Thus, you would argue that we lost a lot of jobs, but I will argue we have created a lot of new high quality jobs, and better economy.

  4. LarrytheG Avatar

    re: ” $11 an hour supports a decent lifestyle”

    just to point out – that’s about $21000 a year. That person will be subsidized by taxpayers via an inherently bureaucratic and costly system.

    Opposition to the minimum wage is based more on philosophical beliefs that hard data especially in metro areas with a lot of service jobs and the funny thing is the opponents always seem to cite SOME dollar figure – as opposed to advocating NO CAP – and let the market determine wages…

    Businesses WILL automate no matter what – those kiosks are put in fast food places regardless of the wage issue.

    But if folks on these low wages are essentially subsidized by taxpayers – doesn’t that mean that taxpayers are essentially subsidizing these businesses that say they cannot exist without low-paid workers?

    We spend all of this time whining about affordable housing and how terrible the govt policies are on subsidized housing – well folks – this
    is where it comes from.

    We should exempt part-time and teens and true apprenticeship type work. We should vigorously enforce E-Verify but we should stop giving credence to these bogus ideas from folks with little more than strongly held philosophical beliefs. There are studies all over the place on this issue and ..surprise, surprise, Conservatives only like the ones that back up their beliefs.

    1. Steve Haner Avatar
      Steve Haner

      There are very real cost of living differences across the state, but I have to agree that $11 an hour is not going very far anywhere. The way forward for these folks is education, training in a skill that pays a decent wage, twice that at least. But concern that artificially increasing the wages will reduce the supply of low-skilled jobs is not “bogus.” It is Econ 101. The real question is how this mandated minimum compares to the real prevailing wage in a market, and in most I bet that is already well above $7.25 but not yet to $15.

    2. I agree with exactly what you are saying. It is impossible for anyone to be self sufficient on $21K a year. Being single, no children, living in a 1 bedroom for $800 a month and only having a $225 a small car payment OR student loan (nothing more) would require $45K a year/$21 an hour to live paycheck to paycheck

  5. TooManyTaxes Avatar

    What would happen to wages for lower-skilled and lower-experienced working Virginians if the country enforced its immigration laws? The GOP whores for cheap-a*s crony capitalists. The Democrats regards American citizens’ interests well below those of illegal immigrants. Just ask Hillary!

  6. LarrytheG Avatar

    “Why it’s so hard to study the impact of minimum wage increases”

    “In the real world, however, mandated minimum wages don’t necessarily lead to job losses. There are theories as to how an innocuous jobs effect might be possible, and we’ll go into those more below.

    Just last year, separate Seattle minimum wage studies by researchers at the University of Washington and the University of California Berkeley suggested polar opposite effects.
    But the research evidence of what actual minimum wage requirements do to job numbers goes both ways; many studies find that minimum wage laws reduce employment, and many other studies on the exact same laws find they have little or no effect on jobs. Some 60 years and hundreds of research papers from prestigious universities, government agencies and private organizations have created little consensus on the subject, academic or otherwise.”

    The basic problem with supply/demand theory is that if you do not hold all other variables fixed and do not let them vary – then supply/demand WILL do exactly as the theory suggests.

    But in the real world – there are a lot of factors that basically have effects that then has to be “accounted” for – and that’s where things get affected by philosophical beliefs…

    If labor was one kind of thing – a standardized widget of which there was one supply – no matter the region or political boundaries or other factors – supply/demand might be somewhat predictable.

    I can give one simple example. When you go to a sports event or other event or even an interstate exit where food is higher priced than you can get someone else – but you are there – you pay the extra price. That totally violates the idea of supply/demand in theory but the theory does not account at all for factors like stadiums or interstate exits where you are there and the cheaper food is not.

  7. djrippert Avatar

    Oh my my my …

    Now comes the conservative Republicans essentially questioning Virginia’s idiotically strict implementation of Dillon’s Rule. Now that the Democrats from NoVa have control of the state the plantation elite who have used Dillon’s Rule to perpetuate The Byrd Machine and rob NoVa blind have suddenly found that it’s no fun to be on the other side of the abuse. They suddenly find that there is not one 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.’

    Really? No kidding. So, hillbilly General Assembly members from Hooterville shouldn’t be making decisions about life in NoVa and yuppie barista representatives from suburbia shouldn’t decide how rural Virginians should live? You don’t say. What has it been – 12 years I’ve been saying that? Now, suddenly, the same conservatives that delighted in holding NoVa’s head under water as a form of Dillon’s Rule torture see multiple Virginias and want regional differences in law? Oh, that’s rich.

    Who could have predicted this? Oh right … me. And every other right thinking person in the state – a group that excludes Virginia’s Republicans.

    “Once the libs get full control of Virginia everybody in the state will pour ever more money down the rabbit hole in Richmond.  Guns will become a dirty four letter word.  School curricula will be standardized along liberal lines and designated safe spaces will be mandatory for all government buildings (including schools).  When that happens I’ll be laughing at the addle brained Virginia conservatives who so loved our idiotic implementation of Dillon’s Rule here in the Old Dominion.  They’ll have it far worse than the conservatives in Maryland.” June 21, 2018

    Looks like it’s payback time. And if you think it sucks now just wait until the next census and redistricting.

  8. musingsfromjanus Avatar

    No one knows or can predict the impact of minimum wage laws which will be different depending on the magnitude of the gap between current prevailing wages and the law and the per cent of low wage hourly workers in the community. It is political virtue signalling for which the consequence are adverse to the supposed beneficiaries but, ironically, probably rewarding to the Party responsible.

    Minimum wage laws are a seductive succubus to those who do not understand or case about Gross Margin or NOP. We just force employers to pay more and bingo! we’ve improved a lot of people’s lives while at the same time scanning qr codes to compare and forcing the seller to match the lower price or filling our Suburbans with Walmart and Costco products. And we probably get rewarded at the voting booth and our cocktail parties for our virtuous concerns.

    The impact varies from virtually nil for businesses for which the hourly labor elements of COGS is relatively small to hugely significant for the opposite business models. So for communities whose labor force is comprised mostly of the former, there will be little employment impact.

    Unfortunately, the P&L is a binary dictator; so, for the opposite there will be an economic impact but not one which will improve anyone’s quality of life. Businesses and shops the vast majority of which are small and family-owned will struggle to comply but many will have to close or retool their business models to fewer employees. Who cares. That’s necessary collateral damage for this virtuous intervention.

    Bigger businesses with more capital will do the same with automation and revised service models – E.g. it will get harder and harder to talk to a real person about any service issue or need.

    Most of those working at minimum wage levels will not find themselves enjoying a 5o% increase in their wages. They will enter the expanding underground economy or [for some, unfortunately, back into] the welfare system or simply disappear from the rolls. But they will probably vote enthusiastically for the party responsible for their condition.

    Whenever government intervenes directly in wages and costs the results are bad for everyone without exception. There are much more impactful and less destructive ways to increase household income.

  9. paulkra77 Avatar

    Even $15 is not enough. I hope democrats will keep their promise and will increase the minimum wage. I have voted for democrates the first time for that reason only.

  10. LarrytheG Avatar

    The basic problem is that supply/demand theory ONLY WORKS when all other variables are held constant.

    Trying to look at a real labor market and claiming that supply/demand theory “proves” that higher wages means lost jobs – is wrong – provably wrong with many studies which detail the things that actually do vary and affect the supply/demand equations.

    Is there a magic number where the minimum wage is “enough” and there is such a thing as too high a minimum wage?

    YUP! but finding out what it ought to be – especially on a geographical basis is not easy but NOT impossible – the Govt does it all the time for government workers –

  11. Citizens certainly deserve to have government dictate that those mean employers pay them a good wage, or is it a decent wage, or a living wage.. well anyway certainly enough so they can enjoy life. Snice what ever number you decide on is based on some guess as to what the minimum wage should be to achieve the above decent living wage I think it should be 20 an hour,, what the heck, if we’re going to make employers do the right thing we might as well see it to that Virginia citizens have a little extra so they can live a really decent life without worries about money,, but hey, since we’re so smart let’s make it 25,, opps scratch that, let’s go for 30 an hour,,, we all know that employers can just charge more for goods and services whether it’s 15 an hour or 30 or,, well since we can dictate a minimum that is good for everyone let’s make it 50 an hour, as discussed businesses can just pass on the increased costs or pay it out of all that money they make..
    Hope my thought process has been helpful. Now that we have decided that government can determine the minimum an employer must pay an employee, next we can have government decide how much McDonald’s charges for a Big Mac.

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