On Tuesday, ballot initiatives succeeded in raising the minimum wage in four states—Arizona, Colorado, Maine, and Washington. This will be good news for some workers but bad news for those seeking jobs—minimum wage increases raise the cost of labor, causing businesses to cut back on hiring.
However, not all minimum wage increases are created equal. The increases in Arizona, Colorado, and Maine will phase in a wage floor of $12 by 2020, while Washington’s minimum wage will go up to $13.50. The current federal minimum wage is $7.25 an hour, but this rate only applies in 21 states. The others have all enacted higher minimum wages on the state level.
Even though the minimum wage in 2020 will be the same in Arizona, Colorado, and Maine, it will not necessarily have the same effect. That is because labor markets vary by state—in some states, wages are already higher, and those states will be better able to absorb a minimum wage increase. Wages differ across states for a number of reasons, including differences in the cost of living (compare Manhattan to Mississippi) and differences in worker productivity.
One useful metric is to compare the minimum wage in a jurisdiction to the median wage. A high minimum wage as a share of the median wage will put more workers and jobseekers at risk of unemployment. Two jurisdictions with the same minimum wage could see different labor market effects if their median wages are different.
To get a sense of how the new minimum wages are likely to play out, I calculated what the minimum-median ratio will be in the four states, assuming nominal median wage growth of 1.5 percent per year. Currently, the minimum-median ratio is below 50 percent in all four states—high, but not excessive.
By 2020, however, the enacted minimum wages will push this ratio to 60 percent or higher in all four states. Moreover, even though the minimum wage (at $12) will have the same dollar amount in both Colorado and Maine, it will do more damage in Maine because it will be higher relative to the median wage.
Within states, the minimum wage increases will also have a disparate effect. In Colorado, for instance, the minimum-median ratio will be 56 percent in the high-wage metropolitan area of Denver. In the rural eastern and southern parts of the state, though, the ratio will be an onerous 76 percent—putting many more jobs at risk. It should be no surprise that the low-wage eastern areas of Colorado voted against the minimum wage increase, while urban areas supported it.
One trend clear throughout research on the minimum wage is that it tends to disproportionately affect young people. This makes sense, as young people usually hold entry-level jobs that pay close to minimum wage and are sensitive to increases in the cost of labor. Evidence suggests that increases in the federal minimum wage were responsible for nearly half the job loss among young, low-skilled workers during the Great Recession.
States that want to raise their minimum wages should consider including lower rates for young people, to mitigate the blow on employment. My own research suggests that a universal youth minimum wage could create over 450,000 jobs for young workers.
With the labor force shrinking as a share of the population and most of those who live in poverty being jobless, raising the minimum wage is likely to be counterproductive. Voters should reconsider their choices—or, at the very least, push for a youth exemption to rein in the policy’s worst effects.
Preston Cooper is a fellow at the Manhattan Institute. You can follow him on Twitter here.
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