Navigating New York’s Minimum Wage Plan From Downstate To Upstate

New York, along with California, have recently been in the news with decisions to raise the minimum wage to $15 over the next several years. However, unlike California, which will have a single minimum wage for the entire state, New York’s minimum wage changes will vary by region (New York Times, 3/31/16).

Specifically, in New York City, the minimum wage will rise from the current state minimum wage of $9/hour to $15/hour for businesses with more than 10 employees in 2018 (and for smaller firms in 2020). In counties near New York City, on Long Island to the east and Westchester County to the immediate north, the minimum wage will reach $15/hour by 2022. In the rest of the state, north and west of Westchester County, the new law raises the minimum wage to only $12.50 by 2021.

Policymakers are tailoring the law geographically to address differences in the wage distribution across the state. As seen in BLS data in the table below, the highest median wage (the NYC Metro area) is at the top and the lowest median wage (Watertown-Fort Drum on the eastern shore of Lake Ontario) is at the bottom.

These changes in New York raise two central questions:

• What’s the impact of this regional tailoring? Does it mitigate disemployment concerns associated with minimum wage increases?
• Based on existing evidence, should geographic tailoring guide policies to raise the minimum wage at state and local levels — and if so, based on what metrics?

So first, what’s the impact of this minimum wage hike? To break down the impact by region, it’s helpful to compare planned minimum wage increases to the alternative — the effect of inflation on wages in the absence of minimum wage changes.

In terms of workers impacted, 73% of New York state employment is in the downstate counties (NYC, Westchester, and Long Island), where the minimum wage will rise to $15 by 2022. Workers upstate will see the minimum wage rise to $12.50 by 2021.

Allowing for 1%-2% annual inflation, over the next two years, the value at the 25th percentile downstate might have risen to about $13/hour in the absence of the new minimum wage, and perhaps to $14/hour in six years. Therefore, more than 25% of downstate workers will reap direct benefits from the minimum wage increase.

The situation is somewhat different upstate. In Rochester (row 6) and the East Central New York non-metro region (row 8), if the 25th percentile had grown by more than about 1.3% per year, then after five years, the 25th percentile would have exceeded the $12.50 minimum wage set for 2021. Unlike downstate where the minimum wage will exceed the 25th wage percentile, more upstate workers would likely make more than the new minimum wage. So for good or ill, the minimum wage hike will have less of an impact upstate than down.

For example, Syracuse and Kingston, the 25th percentile wage (in the absence of the minimum wage) would have had to grow by nearly 2% annually — something not seen in recent years — for it to exceed the planned eventual minimum wage of $12.50. And for the rest of the state, the growth rate would have to exceed 2%, something that seems unlikely given recent history.

All of this tells us that it’s highly likely that minimum wage increases will directly affect about 25% of downstate workers, and indirectly, even more workers statewide.

How high should the minimum wage be, or rather, will New York’s new levels be too high? A common approach to answering this question is evaluating whether the minimum wage will lead to substantial declines in employment. In our assessment of more than 70 studies of the effects on employment, we concluded that modest minimum wage increases — on the order of 10% to 15% — resulted in small and statistically insignificant job losses.

However, we cannot say that the planned increases in New York are moderate; the two increases will total nearly 40% (upstate) and 67% (downstate) by the end of their implementation. These are not modest increases. At the same time, a rule of thumb that some liberal economists use is that a minimum wage equal to about 50%-55% of the median wage would not have significant employment effects if properly implemented (that is, raised in a series of modest steps). When fully implemented, the two minimum wages in New York state will mostly be between 60% and 70% of current regional median wages (after allowing for inflation).

Both of these considerations suggest that these hikes may well lead to employment declines. However, the minimum wage has recently been at historic lows relative to the median wage, so we do not have useful experience to even approximate the magnitude of the effect, much less make any predictions with confidence.

Should there be a greater variation in New York’s minimum wages? If two levels of the planned minimum wages make sense, why not three or more, finely tuned to the situation in each county or a somewhat larger region? Here lies another tradeoff, this time between either exquisitely adapting the minimum wage to each respective labor market or effectively enforcing the law and catching violations. With more minimum wages, effective enforcement becomes more difficult.

Until recently, Germany followed the example of the Nordic countries, and rather than having a nationally legislated minimum wage, instead trade unions negotiate minimum wages (and this is possible in all these countries, where unions are relatively powerful). The wages varied by industry, job, age and experience of the employee, and size of the business establishment. Unions negotiated with employer associations and then applied the resulting minimum wages to all employees, whether union members or not. Ultimately, Germany abandoned this structure, one reason being the difficulty of enforcement because neither employer nor employee could be certain about the appropriate minimum wage value for their situation.

However, trying to further tailor the process in New York would likely lead to high enforcement costs and a minimum wage that is ultimately ineffective.

Since we should not further regionally tailor New York’s policy, should we consider a lower wage? Or are there other ways to think about minimum wage policy? Mark Levinson, Chief Economist for the Service Employees International Union, the labor group that made $15 a thing in the first place, spoke at a recent panel discussion about minimum wage policy. Levinson contemplated which factors should be considered to measure success, and asked, “What should be the criterion about setting a minimum wage? Should it be the level which produces minimal job loss? Or should it be, in the language of the Fair Labor Standards Act, the maintenance of the minimum standard of living necessary for the health, efficiency, and general well-being of workers?”

If nobody knows what will happen if wages rise above where they’ve been historically set, Levinson argued, then surely it’s worth finding out — especially if it would help millions of Americans make a living in the process. “The minimum wage debate has been way too focused on underplaying the certain benefit, as opposed to the uncertain possible costs,” he said.

Liberal economists also find some inconsistency in the idea that job losses shouldn’t be tolerated when setting minimum wage policy. That wasn’t the standard when we outlawed child labor or passed basic safety and health protections. It hasn’t been the standard when regulating coal plants, or negotiating international trade deals. Economists have moved forward with these policies with the understanding they might weaken employment in some industries, while benefiting the economy overall.

In all, there are two larger points being made here.

• One is that with respect to the minimum wage, we need to engage in something like price discovery. Studies have agreed that a higher minimum wage reduces turnover (thereby reducing firms’ costs). The one U.S. study that has looked at the effect of minimum wage hikes on low-income household incomes (rather than on changes in poverty status) found that it puts money in their pockets (and purses). As with almost anything in life, the minimum wage comes with tradeoffs. Since the rates have remained so low over the last few decades, we have a very poor idea of what level of minimum wage increase would bring costs roughly equal to the benefits.
• Second, with other policies that have adverse employment effects, e.g., trade deals and various environmental policies, there are government programs to aid displaced workers. Why not institute, for example, training and job-placement programs for workers displaced by the minimum wage?

New York is entering uncharted territory, with its regionally-specific minimum wage increases that broadly exceed current median wages. The potential effects on employment are difficult to predict, but this model is sure to provide invaluable information as we continue balancing the scales in determining optimal minimum wage policies, both in the extent of wage increases and the degree of regional tailoring.

Dale Belman and Paul Wolfson are the authors of “What Does The Minimum Wage Do?”, an academic analysis of more than 200 studies assessing the effects of the minimum wage on employment, wages, incomes, and more.