As the Ohio Capital Journal reported last week, Ohio’s minimum wage will rise to $8.80 per hour next month.
According to the United States Department of Labor, Ohio’s current minimum wage of $8.70 per hour is higher than most of its neighboring states. Indiana, Kentucky, and Pennsylvania all have minimum wages pegged to the federal minimum wage of $7.25 an hour. Meanwhile, West Virginia’s minimum wage is at about the same level as Ohio’s while Michigan’s is highest in the region at $9.65 per hour.
While the conventional economic wisdom for years was that minimum wage increases hurt low-wage employment, a 1993 study of New Jersey’s minimum wage increase in 1992 started to unravel this consensus. The study found that fast food restaurants in New Jersey saw no change in employment compared to restaurants in eastern Pennsylvania after the adoption of a minimum wage increase.
Why did this happen? This is what economists have been trying to figure out since.
One theory economists have is that local employers have “monopsony power” that keeps wages artificially low. What is a monopsony? Well we all know a monopoly is when there is one producer who produces a certain kind of good. Because you can only get this good from one place, the producer can jack up prices and consumers have to pay more than they would in a competitive market.
A monopsony is when there is only one consumer of a good, in this case labor. Because the consumer of labor has market power to flex, it can keep wages low compared to a competitive labor market and actually increase profits.
So a town that has a few dozen different retail businesses have more options for work, the businesses have to compete with each other for labor, and wages stay competitive. In a town where Walmart is the only employer, the retailer can keep wages lower than they would be in a competitive market and stay profitable.
In situations where employers are exerting market power to keep wages artificially low, a minimum wage increase can push wages up, both helping workers without risking increases in unemployment.
Despite these reasons to be optimistic about minimum wage increases, the CBO still projects that minimum wage increases would likely result in some new unemployment, increasing unemployment negligibly for a $10 minimum wage but increasing by over a million workers with a $15 minimum wage.
Minimum wages in the United States are much lower than other countries. Australia, France, and United Kingdom all have minimum wages that exceed 50% of the per capita GDP. If Ohio matched this minimum wage level based on its GDP, its minimum wage would have exceeded $12 an hour in 2019. A more localized approach could have minimum wages vary on a county-by-county basis. For instance, 50% of GDP per capita in Cuyahoga County would be over $19 an hour while in Vinton County it would only be a little under $6 an hour.
Is $8.80 the right number for Ohio? It seems better than $7.25, but likely leaves people in poverty who wouldn’t be there otherwise. With the amount of attention minimum wages have received across the country, maybe it is time for Ohio to reconsider its own.
This commentary first appeared in the Ohio Capital Journal.