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The economic consequences of California’s $15 minimum wage

By   /   March 29, 2016  /   News  /   No Comments

California voters were supposed to get a chance to decide in November whether they wanted a $15 per hour minimum wage.

But a deal struck this week between Gov. Jerry Brown and the state’s most powerful unions could pave the way for a minimum wage hike to be passed through the state legislature. The deal, announced by Brown on Monday, would give California the nation’s highest minimum wage, surpassing the recently passed $14.75 per hour in Oregon.

“I’m hoping that what happens in California will not stay in California, but spread all across the country,” Brown said.

Photo via Wiki Commons

WHAT BROWN CAN DO FOR YOU: A deal struck this week between Gov. Jerry Brown and the state’s most powerful unions could pave the way for a $15 minimum wage bill to be passed through the state legislature.

California’s wage mandate won’t hit $15 per hour until 2022, though, so by the time it becomes the nation’s highest, it might not have that distinction any longer. As in Oregon, future increases will be linked to the cost of living.

The federal minimum wage is $7.25 per hour.

READ MORE: Even in state that just raised the minimum wage, activists want another increase

If Californians cared to look, the consequences of government mandated wage increases would be plainly evident within two of the state’s largest cities. Lawmakers could also take a close look at the economic conditions in places like Imperial and Plumas counties.

Let’s start in San Jose, which boosted its minimum wage by 25 percent in 2012 with a union-backed city-level ballot initiative. The new $10 minimum wage was good for the city’s lowest paid workers, except for the ones who lost their jobs.

A survey of San Jose businesses in 2013 found that 42 percent had cut staff as a result of the mandated wage increase, while 45 percent reported cutting back hours and 66 percent said they raised prices.

Of the 95 employers surveyed, more than 70 percent said the minimum wage hike had cost them at least $10,000.  Some said the higher wage mandate cost them as much as $50,000 in a year.

Proponents of a higher minimum wage argue that the higher wages mean the overall economy of the city will be better off, even with some workers losing their jobs and some employers taking a hit.  More money in workers’ pockets means there is more for them to spend and that higher level of demand will, in the long run, offset the immediate economic setbacks.

“Raising the minimum wage to $15 statewide is the right thing to do. When workers have more money to live on, our customers have more money to spend,” said Rich Karp, president of Cole Hardware in San Francisco, in a statement provided by Businesses For A Fair Minimum Wage, a group working to raise minimum wages in California and elsewhere.

They also point to a general lack of hard evidence that minimum wage increases led to long-term job losses, even though the one most oft-cited study on that subject was done decades ago and tracked a modest minimum wage increase rather than a massive shake-up like the one California is carrying out.

Californians could also look to Los Angeles, which last year raised its minimum wage to $15 per hour. Shortly afterward, Los Angeles County officials surveyed 1,000 businesses and found 96 percent of them planned to raise their prices to make up for increased labor costs.

One in every five businesses in the county said they would likely lay off workers.

“Many prices will increase, including those that lower-income households commonly face,” concluded the economists who did the survey of L.A. businesses last year. “Wages will rise for those in minimum wage jobs that remain employed; employment opportunities for those at the bottom of the skills ladder will be diminished.”

Where are those cuts most likely to come? You can start with the 600,000 manufacturing jobs in California that currently pay less than $15 per hour.

Map from U.S. Bureau of Labor Statistics, Jan. 2016

NO WORK TO BE FOUND: More than a dozen California counties have unemployment rates of more than 10 percent, ranging from Imperial County (18.6 percent unemployment in February) in the state’s southeast corner, to Siskiyu County (11.3 percent) along the border with Oregon.

Even Slate’s Jordan Weissman, who called the $15 minimum wage deal “a very, very big deal” acknowledges that those jobs are “especially at risk now” before going on to point out that “if this does go wrong, the people who suffer are likely to be extremely poor families.”

Once you get outside Silicon Valley and Hollywood, it’s obvious that California has a lot of extremely poor families like the ones who are already beyond the bottom of the skills ladder.

It’s possible to count the number of people who lost their jobs in San Jose or Los Angeles because of the wage increase. It’s possible to project how many Californians might lose their jobs as a result of a statewide minimum wage increase.

It’s much harder to figure out how many currently unemployed people will never be able to find a job because of it.

Gabe Horwitz, vice president of economic policy for Third Way, said California’s statewide plan is a “blunt approach.”

“Fifteen dollars an hour may work in places like San Francisco or Los Angeles, but it could have very different economic effects in some of the very rural areas in the state,” he said.

That should be a concern for lawmakers who represent any of the 13 counties in California where unemployment rates are above 10 percent.  Most of them are in the rural parts of the state, where a $15 minimum wage doesn’t make economic sense.

High unemployment rates stretch across the entire state, from Imperial County (18.6 percent unemployment in February) in the state’s southeast corner, to Siskiyu County (11.3 percent) along the border with Oregon.

Colusa County, in the Central Valley, leads the state with an unemployment rate of 21 percent. Farther south, in the even-more-rural San Joaquin Valley, places like Merced County (12.6 percent) and Tulare County (12.1 percent) are only doing well if you are using Appalachia as your standard.

Of course, those rural parts of the state don’t have much power in Sacramento, either. They don’t have as many representatives and they don’t have union-backed activists to fight for their causes – ironically, because jobs are a prerequisite to having unions and union-backed activists.

No surprise, perhaps, that some of the people living there would rather break up California than live under new wage regulations that make little sense for their circumstances.

Dramatic wage increases are already forcing difficult decisions in the state’s wealthier areas, where evidence is showing job losses and slower growth, warns Michael Salzman, policy director at the Employment Policies Institute.

“California may be the first state to pass a $15 minimum wage, but it will also be the first to find out why that’s a bad idea,” he said.

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Eric Boehm is the national regulatory reporter for Watchdog.org. He lives in St. Paul, Minnesota. His work has appeared in Reason Magazine, National Review Online, The Freeman Magazine, The Philadelphia Inquirer, The Washington Examiner and Fox News. He was once featured in a BuzzFeed listicle. Follow him on Twitter @EricBoehm87 and reach him at [email protected]