A $15/hour Minimum Wage

One of the proposals by the new Biden administration is to increase the federally mandated minimum wage (MW) to $15/hr. The last increase was in 2009 when it was set to $7.25/hr. As I note in my book, there are now 40 counties and cities in California that have adopted their own ordinance. Most cities have adopted minimum wages at $15/hr. with annual increases determined by statute or some form of the CPI. So what will be the impact of a federally mandated $15 MW? A 2019 CBO study concluded that a $15 MW would impact 17 million workers with wages below the minimum and an additional 10 million workers with wages above the minimum. They also predicted a maximum of 3.7 million workers would lose their jobs.

The impact of the MW on unemployment among young and low-skilled workers is one area where an overwhelming number of economists agree. However, there are some qualifications necessary to clarify the impact . First, as I will detail later, for a MW to have an impact on a labor market it must be a binding constraint. In other words, the mandated wage must be set higher than the market wage. If the market wage for low-skilled workers is $16/hr., the MW must be set higher in order to have an impact. Second, there are several employer responses to a binding minimum wage. The simple Demand/Supply diagram of a binding MW predicts that employers will reduce total hours. What is unclear is how an employer will respond. An employer has three options: reduce hours with no layoffs, hold hours fixed and lay some workers off, or use some combination of hours and layoffs.

While these labor adjustments are descriptive, actual adjustments will depend on the type of business and labor market structure. For example, a small “mom and pop” store may have only one employee who covers for the owners when they are not working. A binding MW may lead the owners to just raise their lone worker’s wages and increase their own hours of running the store. A larger firm with many employees may feel less impact from the higher minimum wage either because they hire few low skilled workers and/or can easily adjust average hours per employee.

Besides the adjustments to labor demand, the MW raises the relative price of low-skilled labor, which leads to substitution towards high-skilled labor, capital, and technological improvements. Examples from fast food restaurants are numerous. Fast-food workers used to take orders and manually fill them. Nowadays, food orders are input into a computer, which tells the worker how much change to return, drinks are filled automatically, and food is cooked according to strict time schedules. Similar adjustments were made at full-service gasoline service stations. Almost all gas stations have switched to a self-serve model.

As I explain in my book, all politics is local, which means that most of the policy action now takes place at the local level. Adopting local MW ordinances has allowed politicians to act opportunistic and claim that they are raising the wages of workers when in fact they are not. As I mentioned above, labor markets are only impacted by the MW if it is set above the market wage.

For example, in 2007 the federal MW was increased to $5.85/hr. per hour and the state MW was increased to $7.50 per hour.[1] Retailers in Silicon Valley, like In-N-Out Burger and Home Depot, had signs above their entrances stating that they were paying starting wages equal to $10/hour for new workers. At these starting wages, the impact of the MW was non-binding in Silicon Valley. Granted there could have been other retailers that were paying near or below the MW, but clearly, there were some large firms already paying above the minimum wage. The city of Mountain View passed its MW ordinance in late 2015. The ordinance set a two-year schedule to increase it to $15.00/hour and then let it increase according to a local CPI index.² The California MW has recently been adjusted to $11.00/hr. The state and federal MW laws are not binding in the city of Mountain View or Silicon Valley. When the MW in Mountain View was increased to $15/hour, In-N-Out Birger and Walmart were already paying starting workers $16/hr.

If you take a look at the California municipalities that have imposed MW ordinances, you will find that they are imposed in urban cities located in the San Francisco, San Jose, and Los Angeles areas. Except for Sacramento, there are no cities with a MW ordinance located in the central valley of California. As I stated earlier this allows for local politicians to engage in opportunistic behavior. On the one hand, they can pat themselves on the back by claiming that they support low-wage workers and are pushing for “living wages” for their constituents. They will claim that these ordinances show how much they care for low-wage workers and how important they are to the local community. On the other hand, these MW requirements are non-binding for most workers, so they have little if any negative impact on labor markets.

So what will be the impact of the federally mandated $15 MW? For urban areas, probably very little impact. For rural areas there will likely be a huge impact. Politicians representing urban areas will likely support the Biden proposal and those representing rural areas will likely not support the proposal. My guess is that there will be an agreement to support a modest increase that will be non-binding in most states.