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Montgomery County Wage Hike Will Drive Business to Virginia

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Montgomery County Wage Hike Will Drive Business to Virginia

October 5, 2017

Montgomery County, Maryland, a suburb of Washington, D.C., is considering following the lead of the Nation’s Capital and raising its minimum wage to $15 an hour by 2020. This would be financial suicide for Montgomery County, because many businesses would just set up shop across the river in Virginia, where the hourly minimum wage is $7.25.

Although there is the potential for the higher wage to benefit a few people, the costs will likely outweigh the benefits. At the county’s Health and Human Services Committee meeting on October 9th, members should advocate against the minimum wage hike.

The bill, originally voted on in January, passed by a 5-4 vote in the county’s council. However, County Executive Isiah Leggett vetoed the bill until further research about the possible consequences could be completed and until revisions were made.

The latest version of the bill calls for businesses with at least 26 employees to raise their minimum wage to $15 by 2020. Smaller business, nonprofits, and in-home health care providers would have until 2022 to implement the increases. The bill also calls for changes to the minimum wage after 2023 based on changes in the Consumer Price Index.

Montgomery County has considered a higher minimum wage since 2013. In 2013, the county’s minimum wage was at the federal minimum of $7.25. Since then, the wage has risen to $11.50. If Montgomery County approves this new bill to raise the hourly minimum to $15, the county will have doubled its minimum wage in less than a decade.

If the new bill passes the council, the county would join other cities, such as Minneapolis and D.C., that have approved similar legislation. But a minimum wage hike of this magnitude is atypical for most counties, aside from California.

Although the median household income for the county is just under $100,000, the distribution of wages across the county is not uniform. The county contains a core of low-skill immigrants who would likely lose their jobs with a minimum wage increase.

Proponents of raising the minimum wage argue that a higher wage would lead to heightened earnings for low-wage workers. With greater earnings, lower-income families could increase their purchasing power, potentially leading to a reduction in poverty, wage inequality, and hunger and food insecurity. However, if jobs became automated, or if higher-skill workers were hired, unemployment would take the place of higher wages.

Fewer people are likely to benefit than proponents anticipate. A recent study completed by the economic consulting group PFM indicates that local businesses will likely take actions to accommodate for the higher wages by cutting jobs. Additionally, 59 percent of business owners surveyed indicated that they would likely decrease employee hours, and some suggested they may be forced to close their businesses.

Other research, such as the paper on Seattle’s $15 minimum wage, found that employers, if they did keep workers, typically chose to hire more experienced candidates rather than lower skilled workers. If people lose their jobs or are passed over for jobs in favor of higher skilled workers, they will not experience the would-be benefits cited by supporters of higher minimum wages.

What is also noteworthy about the Seattle study is its examination of incremental increases in the minimum wage. The researchers found very small effects for the first increase in the wage from $9.47 to $11, but when hourly wages rose from $11 to $13, there was a 9 percent reduction in hours worked and earnings for low-wage workers. These findings suggest that incremental changes may not affect employment in the same way every time and also may have exponential consequences as the wage continues to rise.

Firms will be discouraged from starting new businesses in the county. As we have seen in D.C.,  lower-income areas have struggled to encourage new grocery stores to enter the market because of the high wages they would have to pay their workers.

Additionally, firms may flee the county and move to other nearby counties and states. With the exception of Prince George’s County and Washington, D.C., both of which cooperated  with Montgomery County in 2013 to raise minimum wages to avoid intra-regional movement, Maryland’s minimum wage is $9.25, and Virginia’s remains at the federal minimum of $7.25. Companies that have flexibility regarding their location may now choose to relocate to an area with a more competitive wage, taking their jobs with them. Virginia in particular will benefit.

Youths are also likely to suffer from the higher minimum wage, according to the PFM study. Since raising its minimum wage in 2014, Montgomery County has seen a 2 percent increase in youth unemployment. Additionally, the study found that 67 percent of county business owners believed that the hike in wages would negatively affect the availability of entry-level jobs for employees with little to no experience.

It sounds good to mandate an end to poverty by requiring businesses to raise wages. However, as was seen in Seattle, those who need help are actually those hurt. In the case of Montgomery County, the costs of following in D.C.’s footsteps are likely greater than the benefits. The county should leave wages where they are.

 

Emily Top is a research associate at Economics21. Follow her on Twitter @EmilyKTop.

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