Advocates calling for the General Assembly to increase the minimum wage rally outside the Capitol in 2019. (Photo courtesy NBC12)
Virginia’s minimum wage recently increased to $12.41. Democrats sought a higher increase last year but Gov. Glenn Youngkin vetoed that effort. In his veto explanation, the governor repeated talking points used for the last half-century, including economic freedom and business competitiveness. I expected this from a former investment manager, and I can sympathize. Having worked in hospitality management after college, I know labor is the largest expenditure for most companies and managers are always under pressure to keep costs low.
But Youngkin also said something blatantly untrue: that increasing the minimum wage would jeopardize jobs.
There is no issue in economics studied so extensively as the minimum wage. The overwhelming conclusion is that raising the minimum wage is not a job-killer. Several economists have won Nobel prizes, including in 2021, for demonstrating this. As Democrats again push their minimum wage bill and Youngkin contemplates his future, it is important that the public knows what economic research tells us about the minimum wage.
Before modern data science, it was generally taken as an article of faith that minimum wage laws had a negative effect on jobs. Many just visualized the price and demand curves from Econ 101. If the price line shifted upwards, the total area of economic activity diminished.
Then in 1994, economists David Card and Alan Kreuger studied fast-food workers in New Jersey and Pennsylvania before and after New Jersey raised its minimum wage. They found that employment actually grew in New Jersey after the state’s minimum wage increase. These findings have been replicated by others using different data sets and subsequent minimum wage increases.
The Putty-Clay research model was developed in part to explain why there is little-to-no job loss. In the Putty-Clay model, when a business first establishes itself, it can choose from any combination of feasible capital and labor it wishes. After this initial selection, the costs of meaningfully altering this are so great that businesses won’t do it in the face of minimum wage increases.
Research also supports the idea that increasing the minimum wage has positive effects beyond direct employment. Studies have shown increases in happiness and productivity in society as a whole. Wages of those earning above the minimum wage also increased in tandem. Finally, there have been reductions in crime and community displacement associated with minimum wage increases.
The biggest dissention comes from David Neumark, who found a slight negative effect using data from the Current Population Survey (CPS) —mostly involving the number of hours worked by high-school age people. However, Neumark’s analysis has been criticized for omitted variable bias and it should be noted that these small losses appear only in the short-term. Other studies using the same data show no negative effect, and instead a gain, when longer time periods are utilized.
There is evidence that the magnitude of the increase matters. Nationally, most minimum wage increases resulted in salary increases between 16-25%. Virginia Democrats’ plan for a $15 minimum wage amounts to a 20.8% increase. The outlier is Seattle, which doubled its minimum wage when it increased to $15 in 2014.
An analysis by Jacob Vigdor’s and colleagues, using data provided by local and state government, found that Seattle’s minimum wage increase led to a decrease in the number of hours worked by employees within city limits. Similar to Neumark’s findings, inexperienced high school-age workers saw the brunt of this reduction. The analysis also showed that employers “gamed” the law by shifting activities to the surrounding areas of King’s County. Thus, it’s hard to say magnitude and reach don’t matter. However, it would be much more difficult to bypass a state law than a local one, and there would be much less incentive with a smaller increase, like Democrats are proposing.
But Youngkin, prima facie, does have a legitimate concern about regional differences across Virginia. What differences, if any, minimum wage laws have on rural versus urban and suburban economies remains under-analyzed. According to MIT’s living wage calculator, a family of four in Arlington County (where I am from) needs a livable wage of almost $48/hr. Whereas in Wise County, it is only $35/hr. This is an annualized difference of about $25,000. What does all this mean? There is a risk of further hurting rural Virginia, which justifiably feels cannibalized and abandoned by wealthier parts of the state.
As John Maynard Keynes once said, “In the long run the market corrects itself, but in the long run we’re all dead men.”
From 2021 to 2023, the bottom 20% of earners in Virginia only saw their wages grow by about $1,613. When adjusted for inflation, they actually lost $171. Meanwhile, the MIT calculator estimates the living wage for one person in Wise is now at $18.36 — more than either the current minimum wage or what Democrats propose. As Youngkin enters his final year as governor, he can afford a “wait and see” approach to alleviating wage poverty; over 1 million Virginians do not have that luxury.
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