Research & Commentary: Delaying Minimum Wage Increase a Necessity for the Survival of California’s Businesses

Published July 24, 2020

With California’s economy struggling due to the COVID-19 pandemic, businesses and trade groups are urging Gov. Gavin Newsom to delay the state’s minimum wage increase, which takes effect on January 1 and will raise wages to $13 an hour for businesses with fewer than 26 employees, and $14 per hour for businesses with more than 26 employees. This increase is a gradual step on the way to a $15 an hour minimum wage beginning in 2023.

According to California Chamber of Commerce President Jot Condie, as many as 27,000 restaurants throughout the Golden State would be in danger of permanently closing if the increase were to take effect. Wage increases have already taken place in certain municipalities with their own minimum wage laws. Beginning July 1, these increases took effect in Alameda, Berkeley, Emeryville, Fremont, Los Angeles, Malibu, Milpitas, Novato, Oakland (for hotel workers), Pasadena, San Francisco, San Leandro, Santa Monica, and Santa Rosa.

Although minimum wage laws attempt to create a minimum standard of living to protect employees’ health and well-being by mandating a base level of pay from employers, the unintended consequences of such laws can inflict more harm than good.

Minimum-wage laws require businesses to pay their workers higher wages, forcing them to adjust elsewhere to offset increased costs to maintain profitability and avoid bankruptcy. These cuts often lead to reduced hiring, fewer work hours for employees, diminished fringe benefits for employees, and higher prices for consumers.

A 2007 study from economists at the University of California-Irvine and the Federal Reserve Board examined the body of work on the subject and found 85 percent of the studies they considered credible demonstrate minimum wage laws cause job losses for less-skilled employees.

In California itself, a 2017 Employment Policies Institute study found “each 10 percent increase in the minimum wage has led to a nearly 5 percent reduction in employment in industries with a higher percentage of lower-paid employees. Across all industries, their findings imply that each 10 percent increase in California’s minimum wage has reduced employment for affected employees by 2 percent.” The study estimates 400,000 jobs will be lost in California by 2022 if the march to a $15 minimum wage continues. A different analysis from the American Economic Forum in 2016 puts this job loss number closer to 700,000.

California need only look to Seattle to realize how a high minimum wage can harm a local economy. A recent study from the University of Washington analyzing the minimum wage increases in Seattle found evidence that hiking the minimum wage to $13 per hour has had a negative impact on the city’s total payroll—particularly hurting low-wage workers.

The study examined the changes to Seattle’s labor market after each of the incremental wage increases in the city: the hike to $11 per hour on April 1, 2015 and the increase to $13 per hour on January 1, 2016. The results measure the number of low-wage jobs available, the number of hours that workers in low-wage jobs worked, and the amount of money paid to workers in these jobs. The first minimum wage increase in Seattle, from $9.47 to $11 per hour in 2015, led to only a modest reduction in employment. The second increase to $13 per hour on January 1, 2016, had a more negative effect on the city’s labor market. Although the study cited a 3 percent increase in hourly wages for low-wage employees, it also found a 9 percent reduction in the number of hours worked at wages below $19 per hour.

As the Seattle example demonstrates, increasing California’s minimum wage would likely have a dramatic effect on the number of low-wage jobs in the city. In Seattle, there was a $100 million per year reduction in the total payroll for low-wage jobs once the wage reached $13 per hour—the exact opposite of what minimum wage increases are meant to achieve. The results from Seattle seem to indicate any positive impacts of a minimum wage hike are limited and inevitably decrease dramatically if the rate is increased by too much and/or too quickly.

Proponents of these laws also argue minimum-wage laws protect workers from exploitation by employers and reduce poverty. Opponents cite evidence that increasing minimum-wage laws is not an effective way to address poverty and often has the opposite effect by creating barriers to entry for workers with less skills and education.

In a 2010 study, economists at Cornell University and American University found no reduction in poverty in the 28 states that raised their minimum-wage laws from 2003 to 2007.

Increasing the minimum wage is not an effective method of reducing poverty, and it harms workers by creating barriers to entry for less-skilled and less-educated people. Cities and states should avoid arbitrary minimum wage hikes and let the market dictate wages instead. In a time of massive economic uncertainty and millions unemployed, increasing wages and further endangering businesses is the wrong move.

The following documents provide more information about minimum wage laws.

California’s Dreamin’ of Higher Wages: Evaluating the Golden State’s 30-Year Minimum Wage Experiment
This study from Dr. David Macpherson of Trinity University and Dr. William Even of Miami University measure the empirical effects of minimum wage increases in California from 1990 to the present, and estimate the impact of California’s current minimum wage law. They find that past minimum wage increases in California have caused a measurable decrease in employment among affected employees. Specifically, they find that each 10 percent increase in the minimum wage has lead to a nearly five-percent reduction in employment in industries with a higher percentage of lower-paid employees. Across all industries, their findings imply that each 10 percent increase in California’s minimum wage has reduced employment for affected employees by two percent.

Minimum-Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle
This paper from the University of Washington evaluates effects of the Seattle Minimum Wage Ordinance on wages, employment, and hours worked for low-wage workers in the city. “Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016. Evidence attributes more modest effects to the first wage increase,” the study concludes.

Counterproductive: The Employment and Income Effects of Raising America’s Minimum Wage to $12 and to $15 per Hour
In this Issue Brief published by the Manhattan Institute, Douglas Holtz-Eakin and Ben Gitis examine the economic and policy implications of raising the federal minimum wage to $12 per hour or to $15 per hour. “We focus on how raising the federal minimum wage would affect the very low-wage workers whom the policy is intended to help. Overall, we find significant trade-offs in raising the federal minimum wage.”

Busting 5 Myths about the Minimum Wage
James Sherk of The Heritage Foundation debunks five myths about minimum wage hikes, often used by proponents of minimum wage laws: “A higher minimum wage would help some workers, but few of them are poor. The larger effect is hurting the ability of potential workers living in poverty to get their foot in the door of employment. A minimum wage hike might help politicians win plaudits from the press, but it wouldn’t reduce poverty rates.”

Unintended Consequences of Raising the Minimum Wage
Antony Davies of the Mercatus Center examines arguments for and against minimum-wage increases and presents new results comparing employment for workers with differing educational attainments.

The Negative Effects of Minimum Wage Laws
Mark Wilson of the Cato Institute reviews the economic models used to understand minimum wage laws and examines available empirical evidence. Wilson describes how most of the academic evidence shows minimum wage laws have negative effects, and he discusses why some studies produced seemingly positive results.

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