The Minimum Wage in California (Mar. 29)

Mike & Co. –

This week, far from spring recess in Washington, California Gov. Jerry Brown struck a deal with Democratic legislative and union leaders on a new state minimum wage hike plan.  The plan, mandating a minimum wage offer $15/hour by 2022, is one of the largest states economic policy experiments in recent years.  While $15 an hour is almost double the current federal minimum, it’s not without precedent — it’s roughly the same rate as in France.

The benefits of the wage hike are clear enough — millions workers in the state would stand to see a 50 percent increase in pay over six years.  It could also make California a Mecca for other workers.

But there are risks, too. Below, we look at the most salient of these risks and the policy options available to mitigate them.

Best,

Dana

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The Deal

The agreement reached phases in the stare minimum wage increases from $10 per hour to $15 by 2022 for large businesses and 2023 for smaller firms.  It’s bound to have an enormous impact on the 2.2 million workers earning the minimum in California today.  xx more would be covered by 2022.  Secondary economic repercussions could include higher prices for the state’s consumers and a change in sectoral composition of the California workforce.

The bill still needs to pick up the support of moderate Democrats in the state legislature to ensure its passage.  That’s no small task, as businesses and their allies are prepared to oppose the wage hike.  Faced with the increase in wage costs the bill mandates, businesses say that downsizing their work force and raising prices may be necessary, which is the pattern seen in jurisdictions that have attempted more modest wage hikes.

Risks and Mitigation Measures

  •  Job Loss from Wage Costs —  The most immediate risk that is that higher wages should theoretically result in fewer jobs.  In 2014, CBO released a report concluding that raising the federal minimum to $10.10 from $7.25 would result in the loss of 500,000 jobs.  Expedited UI eligibility for minimum wage earners who lose their jobs  is a potential policy option.
  •  Economic Downturns—  The most serious risk is that shifts in labor market and other economic conditions might do suddenly what inflation will eventually do anyway — make the rate, which is not indexed, either over- or under-inclusive.  As a hedge against emergencies or changes in conditions that undermine the rate policy the bill permits the Governor to suspend the wage hike in times of “economic malaise” — a provision Brown called essential to win his support.

Automatic stabilizers, such as unemployment insurance and food assistance benefits, could see a major rise in the wake of a wage hike as well.  Policymakers might consider bolstering these programs to ensure that any economic costs arising from a wage hike are adequately addressed – not only from the newly unemployed seeking benefits but in order to cover the cost of higher prices brought on by new demand.

  •  Wage-Push Inflation— A secondary risk of raising the minimum wage is a broad increase in prices – this is often cited in conjunction with the job loss argument, because it would place unemployed workers in a more precarious position than otherwise.  Gov. Brown’s ability to halt the rise should be a comfort to those concerned with rapid increases in prices.

 

  •  Disparate Local and Sectoral Impact — The risks cited above unequal impacts based on sector and location the increase is applied to. Understandably, employers in sectors that tend to pay lower wages are most concerned about such a steep increase in the minimum wage – agriculture, fast food, and labor-intense businesses stand to suffer more as a result.  It’s unclear how California’s plan would address these concerns, but historically there have existed “carve outs” for tip-supported jobs like waiting tables in restaurants – this plan would most likely maintain the separate minimums for that type of work.

 

On a national scale, the disparate impact among various communities of big increase in the minimum wage can be neutralized by adopting a formula that adjusts the rate to reflect the cost of living in a given community, as suggested by HRC. Something that works in Los Angeles, California may not work in a rural town somewhere else.

 

  •  Transition Costs—  The phase-in nature of the increase, which allows small firms an extra year to accommodate the new minimum, should help get the small business community on board.

 

Early Read:  Seattle and San Fran 

Per the WSJ:  “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 percent compared with Washington’s 6.9 percent.”

But despite concerns from business leaders, moderates, and conservatives, there is good reason to think that if any state can manage such an ambitious change, it’s California.  Having already raised the state minimum wage 25 percent between 2014 and 2016, and with a dozen cities, mostly large and wealthy ones, with wage floors higher than the state minimum, California businesses are already somewhat accustomed to both higher wages and tumultuous changes.  

Candidate Perspectives 

HRC has, per the NYT, “eloquently defined” workers’ rights as human rights.  She has called for a $12 federal minimum wage and has set forward a broader economic agenda aimed at increasing wages for middle-income Americans as well.

The Clinton proposal, however, would work better for the nation than California’s, and Sanders’, $15 minimum.  Right now, California is only increasing its minimum wage by 50 percent, from $10 to $15. Adjusting the federal minimum (which more than 20 states adhere to) upward by more than 100 percent over the same period of time could well run some of the risks mentioned above and so this bill and any national variation could benefit from some of these mitigating measures.

 

 

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