Why California’s risky experiment with a $15 an hour minimum wage will likely backfire, Part I
. . . the younger brer, and Maddog have been discussing the problems, effects, and likely outcomes from the Oregon, and California experiments with a radically higher $15 minimum wage.
The links it to Part II is here, and Part III is here, and Part IV is here.
California is unfriendly to business, this change in labor rates will make it less friendly to business. This unfriendliness is manifested in high regulations, and high taxes. It is ranked by Chief Executive Magazine as the worst state for "level of taxation, burden of regulation, workforce quality, and living environment." The Tax Foundation found California 48th worst for business tax, and 50th for its personal income tax burden. You go Cali!
The $15 per hour minimum wage acts like a $10,000 per year tax on full-time minimum wage workers. Many businesses which employ higher numbers of minimum wage workers operate on margins of only 2-6% profit. This large additional cost will be a serious problem to these low margin/high minimum wage worker businesses.
John A (Naif) in the comments makes two inane points, first he claims, "it's not a tax." We know, as does our faithful correspondent, he utilized simile, naif! Second he claims, the law will increase the wage amount for all businesses/restaurants by the same amount. No. It will affect the ones with higher numbers of sub $15 per hour workers in very different ways than restaurants with lower numbers. Also he assumes all restaurants will need to increase costs by the same amount. No. See above. Mid and high end restaurants have ways of dealing with these changes, they could eliminate tipping since the waiters will be paid a living wage, for example. Restaurants like fast food do not have these avenues to reduce customer costs (more accurately keep total costs the same as before). Further, this problem will be localized, smaller in San Francisco and other wealthy areas, and greater in places with large numbers of low wage workers like El Centro, Merced, and Salinas. Here Naif suffers from Pauline Kael Syndrome, where the afflicted does not know anyone who makes minimum wage, and would not be affected by a $.50 or even a $1 increase in a Big Mac, so he cannot understand why anyone else would be. Well played!
Naif also misses the point entirely that many people will simply see the price increase necessary in the product, and decide it is not worth the price. So, if a 10% price increase results in a 10% demand decrease, there will need to either be further price increases or job reductions. This will simply grow over time as the minimum wage is phased in. In locations with a 15 % jobless rate cutting even more workers out of the wage pool can create a sustainable downward economic spiral. You know, like Detroit.
He also seems to not understand about productivity which is nothing more than making more product with less wage costs/fewer workers. Automation exists, and as wages rise, automation alternatives become economically feasible. The ultimate problem with this is once the magic number is reached, nearly all the restaurants in the category will simply adopt this technology or bankrupt. While I do not know where this number is, I suspect that it is somewhat less than $15 per hour minimum wage. Again, this will cause an increase in joblessness, so see above for more info, er, like Detroit.
Many localities in California may be economically too weak to support a $15 per hour minimum wage. Outside the coastal enclaves, California is not an economic powerhouse, it is a very weak kitten. The wealthy coastal enclave cities may not suffer too much, but the low wage cities will suffer greatly with a 50% wage increase to low end workers.
A one size fits all won't work for California's low wage, low cost of living cities.
"To help understand how the “one-size-fits-all” approach of a $15 an hour minimum wage will have a disproportionate adverse impact on low-cost communities in California, the table above displays the local annual salaries that would be equivalent to a $100,000 salary in San Francisco, adjusted for differences in cost-of-living using this website. For example, the cost-of-living in Bakersfield is about 57% lower than San Francisco overall, including housing costs that are 79% lower, so that an annual salary of $100,000 in San Francisco would be equivalent to a salary in Bakersfield of about $43,000. Local incomes equivalent to $100,000 annually in San Francisco are displayed above for the other nine cities.
Then if we assume that a $15 an hour minimum wage is appropriate for a high-wage, high-cost city like San Francisco, we can calculate what the minimum wage should be in the ten cities above adjusted for the much lower costs of living in those communities. Adjusted for the 57% lower cost of living in Bakersfield, the minimum wage there shouldn’t be $15 an hour like in San Francisco, but rather only $6.43 an hour. Minimum wages adjusted for the cost of living in the other nine California cities are displayed above, and range from $6.10 an hour in Hanford-Corcoran to $7.90 an hour in Salinas. Stated differently, we could also say that if a $15 an hour minimum wage was appropriate for Bakersfield, the minimum wage in San Francisco, adjusted for its much higher cost of living, should be about $35 an hour, and not $15. By either minimum wage comparison, the costs of living are so disparate between San Francisco and the cities listed above, that there is no way that a uniform $15 an hour wage could be optimal in both communities."
So, part of the problem in all of these cities already is that the California current minimum wage of $10 per hour is too high! Brilliant. We should expect the problems of Merced, Salinas, and Bakersfield to spread to even more cities, and towns throughout California as the minimum wage slowly rises, and destroys employment in these towns.
Oregon's model which has a higher minimum wage for large cities and a lower minimum wage for rural areas might be better than the California one-size-fits-all model, but neither rate above poor. The market is well equipped to evaluate and provide an accurate minimum wage for each location, and for each individual worker's skills, talents, and experiences. But legislators are the smartest people on earth, and they know everything, including what a six-layer dip maker, a cunning linguist, or a teen exorcist should make as a wage.
Honestly it seems more likely the politicians understand that driving people on to the dole keeps them in work.