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California's Higher Minimum Wage: At Best Counterproductive

Posted by Nicole Liotine | Oct 29, 2013 | 0 Comments

By Rafael A. Icaza –

On September 23, 2013, California Governor Jerry Brown signed legislation raising the minimum wage from $8.00 to $10.00 by 2016.  This is bad news for the poor, the unemployed and businesses.

In March 2013, the National Federation of Independent Business released a study warning that a minimum wage increase in California could result in the loss of more than 68,000 jobs over 10 years.  Separately, writing in the San Jose Mercury News, Michael Saltsman, research director at the Employment Policies Institute, stated that “the proposed wage hike policy would make it more difficult for young adults—who already face a 34 percent unemployment rate in California—to find entry-level jobs where they would receive on-the-job experience and training.”  Saltsman claimed that “This drop in opportunities for young people isn't just anecdotal.  It's been measured empirically.  UC Irvine economist David Neumark . . . teamed up with Federal Reserve Economist William Wascher to summarize the research on the minimum wage from the last two decades. They found that 85 percent of the most credible studies pointed to job loss for less-experienced teens following a wage hike.”  Common sense assumptions and observations bolster the case against raising the minimum wage.  (1) Businesses located in economically-depressed areas make less money than businesses in prosperous areas; (2) businesses in depressed areas are less able to pay higher costs, such as labor costs, than those in prosperous areas; (3) unemployment, especially among the young, is higher in depressed than in prosperous areas; (4) if the costs of doing business increase, businesses in depressed areas are less able to absorb them than their prosperous counterparts; and (5) in order to survive or compete, poor-area businesses have to cut costs—including labor costs.

Minimum wage supporters see things differently.  For example, Holly Sklar, director of Business for a Fair Minimum Wage, writing in the Sacramento Bee on October 22, 2013, made two arguments for raising the federal minimum wage from the current $7.25 an hour.  The first was that doing so would have good economic results:  “When a growing share of workers make too little to buy necessities—much less afford a middle-class standard of living—it hurts Main Street businesses and our communities.”  Her second argument was a mixture of appeals to fairness, envy and class warfare:  The minimum wage must be raised because “the top 1 percent of households doubled their share of our nation's income from 11 percent to 22 percent” between 1968 and 2012; “The top 1 percent took 95 percent of all the income growth from 2009 to 2012”; “Today's business CEOs make more in a year than most small business owners make in their lifetime”; and “The [Wal-Mart] heirs on the Forbes 400 list of riches Americans have a combined net worth of $136 billion[, but] Wal-Mart workers top the state lists of employees depending on the public safety net.”

If Sklar's first argument was sound—that a higher minimum wage helps, rather than hurts, Main Street businesses—one would expect them to clamor for ever-higher minimum wages.  But they never do and that never happens.  Business organizations, such as the aforementioned National Federation of Independent Business, as well as State and U.S. Chambers of Commerce, always oppose minimum wage increases.  At least in this case business interests are aligned with those of the unemployed, especially unemployed young adults:  If we want jobs for them, we need to reduce the costs of doing business where they live, so local businesses can afford to hire them.

Regarding the appeal to envy, I too am scandalized by how much some executives make, but raising the minimum wage is counterproductive as a means to bridge the gap between the rich and the poor, since it tends to increase the poverty of the poor.

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