The Corner

Economy & Business

California’s Latest Move to Sabotage Its Low-Wage Workers

As you probably know, on Monday California announced it would raise the minimum wage to $15 an hour by 2022. This is significantly larger than the hike proposed by President Obama last year. It makes California the largest state to attempt to lift base earnings to that level. As you can imagine the arguments for the minimum-wage hike are the usual ones:

The increase will boost the wages of about 6.5 million California residents, or 43% of the state’s workforce, who earn less than $15, according to worker group Fight for $15. The proposal had been headed to a statewide referendum. It’s now expected to be approved by the state assembly.

The move we are told is “propelling a campaign to lift the pay floor nationally.” While it is tempting to embrace a federal minimum-wage increase from a position of compassion, economists have long known that imposing a legal price floor tends to create a surplus in a market. The same is true in the labor market.

Research by economists David Neumark of the University of California, Irvine, William Wascher of the Federal Reserve Board, and Mark Schweitzer of the Cleveland Fed shows that minimum-wage policies can increase poverty (PDF), so poverty reduction certainly shouldn’t be expected as a benefit of raising the minimum wage. That’s because while a minimum-wage increase raises the wages of some people, it also reduces employment of young, low-skilled people. The Congressional Budget Office (CBO) under Doug Elmendorf, for instance, calculated that an increase from its current $7.25 level to $10.10 per hour would cost about 500,000 jobs. This is likely a low-ball number but it has the merit of illustrating the tradeoff that raising the minimum wage requires.

Imagine how many jobs may be at stake with a raise to $15 per hour. Democratic governor Jerry Brown knows — before agreeing to this deal, he used to warn people that raising California’s minimum wage would “put a lot of poor people out of work.” Ah politics!

The problem is that this politicking will cost some people their jobs. The Journal reports:

About four million workers in the Golden State earn between $10 and $15 an hour, according to estimates by University of California-San Diego economist Jeffrey Clemens, and many companies will handle the added cost by hiring fewer workers. The American Action Forum, a free-market think tank, reports that California’s 50% increase would eliminate nearly 700,000 jobs—which means higher unemployment for the poor and least skilled in particular.

Seattle and San Francisco last year started moving toward $15 an hour, and the early results aren’t promising. Job growth in the restaurant and bar industry, which employs roughly half of minimum-wage earners, has dropped over the past year and declined relative to surrounding locales. In Seattle restaurant employment grew 1.4% compared with Washington’s 6.9%, as American Action notes.

The good thing about the the California move is that, compared the small scale experiments provided by Seattle and San Francisco, it will give economists more data to study the impact of the policy at a very large scale. What we are likely to find is that wealthier areas are probably going to be able to handle better some of this cost and will be less affected since fewer people work at these lower wages. However, other places like Fresno will take a big hit since the companies have less margin to absorb the extra cost and more people will be affected.

Only about 22% of San Francisco’s workers would be covered by the new law, according to data crunched by David Neumark  an economist at the University of California-Irvine.

But in places like Fresno, where the jobless rate is still 10.5%, closer to 50% of workers would be affected, slamming employers with heavy costs that will force layoffs. Ditto for Merced, where the unemployment rate is 12.6%. There will be more examples like Wal-Mart’s recent decision to close a store in Oakland, Calif., where the minimum wage is $12.55 and some 11,000 people applied for the store’s 400 positions. Good luck to the high-school dropouts permanently priced out of a job in the name of what Governor Brown calls the need for “economic justice.”

That’s not much different than what Governor Brown found when he last look into the impact of raising the minimum wage in California:

Governor Brown should revisit the economic estimates of his own administration. The California Department of Finance last year opposed a gradual statewide minimum-wage increase to $13 an hour due to “significant, unbudgeted costs.” The Golden State would have had to pay billions in higher wages for government workers—home-care professionals, health-care staff, even seasonal workers at parks.

The analysis found that costs to businesses would result in slower job and income growth, which would eat into tax revenue. The government would have to spend much more to alleviate the problem it created: Unemployment benefits would have ballooned by $115 million in 2016 and $536 million by 2019 as the wage climbed. Expect the damage to be worse with an increase $2 higher to $15.

One thing is sure, it won’t be long before Californians see what McDonalds does in France and other European countries in response to the high cost of labor: They will install touch-screen computers in all their restaurants to take your order and your money.

If robots were a real interest groups (well, their makers may be), I would say that they are probably behind Jerry Bown’s decision to change his mind about the hike in the minimum wage. Unfortunately, the people behind convincing Brown to jack up the minimum wage are people who are always assuming the worst about deep-pocketed employers exploiting their employees while assuming unicorns when it comes to the consequences of their policies. Because, let’s face it, the replacement of some jobs due to automation will happen for sure but this very large hike in the minimum wage wil only accelerated the process.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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