When I was living in Nebraska in 2014, the state passed a citizen-initiated minimum wage increase to raise the wage from $7.25 to $9 an hour.
At the time, Nebraska’s minimum wage was the highest in the country after adjusting for local cost of living. Nebraska was on the front end of a series of citizen ballot initiatives passed to expand minimum wages in states across the country, many passing by wide margins.
I was surprised when I moved back to Ohio in 2017 that there was not any active movement to increase the state minimum wage. Ohio is a state with a stronger labor history and presence than Nebraska, so I expected there would be a movement to increase the state minimum wage.
Here we are six years later, and ballot language has finally been approved for a vote on a new minimum wage for Ohio. The new proposal would raise the state minimum wage to $12.75 in 2024 and $15 in 2025 then index it to inflation after that.
Since the current minimum wage is also indexed to inflation, the 2025 minimum wage under current law will probably end up in the $11 an hour range. This means that the hourly minimum wage would be set four dollars higher under the proposal.
Minimum wages have had an interesting history among economists. They are a classic example of a price floor, where prices for labor are not allowed under a certain value. Neoclassical economic theory suggests this should lead to a shortfall in jobs since some companies willing to pay less than the minimum wage will not be able to hire workers willing to work for less than the minimum wage.
Over the past couple of decades, though, many economists have been questioning whether minimum wage increases will necessarily lead to employment decreases.
One situation where minimum wage increases will not lead to unemployment are in competitive labor markets where wages are high. If workers can get jobs basically where they want to and this is driving nearly all wages above the minimum wage rate, then there are very few workers willing to work for lower than the minimum wage.
This could be the case in a place like the Columbus Metropolitan Area, where unemployment is at 3.4% and wages are relatively high.
A problem with this situation is that it also means the minimum wage will not have much of an impact. If few people make below the minimum wage and thus are not likely to lose their jobs, few people are also eligible for higher wages because of the increase.
Another situation is in places where markets are not competitive, particularly monopsonistic labor markets. Monopsony is the opposite of a monopoly: instead of there being one producer of a good, there is only one consumer of a good, in this case labor.
If employers (consumers of labor) have too much market power, they can keep wages artificially low, leading to an inefficient labor market. A minimum wage in this scenario can push wages nearer the level they would be in a competitive labor market.
If Wal-Mart is the only employer in town, they can keep prices for labor lower than they would be in a competitive labor market. They also could raise the price over the minimum wage threshold in order to corner the labor market. These sorts of dynamics could be at work in some of Ohio’s more rural and small-town communities.
While a $15 minimum wage would have been unthinkable in Ohio 20 years ago, it seems pretty pedestrian from a policy standpoint now. Yes, there will be some places where wages will go up, but we’ve seen this policy implemented elsewhere and have not seen mass localized unemployment, suggesting other forces may be at play here.
This commentary originally appeared in the Ohio Capital Journal.