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California’s Minimum Wage Increase: Expert FAQ

Sept. 14, 2013
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On Thursday, California’s state legislature approved a bill that will boost its minimum wage to $10 by 2016.

Critics of minimum wage increases claim that the policies are political tactics and totally lacking in economic sense. If you took an introductory economics class, you might remember learning that instituting a minimum wage should price workers out and therefore lower employment. Economists, however, are split on the effects of raising the minimum wage.

Economists mostly disagree about two questions:

  • Will increasing the minimum wage make it harder for low-skilled workers to find employment?
  • Are the benefits gained my low-skilled workers greater than the distortionary costs of an increase in the minimum wage?

Proponents of minimum wage increases typically argue that the increases will reduce poverty, especially among working women, and have little effect on unemployment. They also believe minimum wage increases will stabilizes low-skilled labor because businesses save money on training and recruitment.

Detractors of minimum wage increases rely on a host of arguments. They believe that a minimum wage increase will increase unemployment, cause inflation and force jobs abroad. They also believe that increasing the minimum wage disproportionately the already employed.

So how exactly will California’s proposed minimum wage increase play out? To help answer these questions, NerdWallet turned to some economists and a sociologist for help:

  • UMass-Amherst Professor Arindrajit Dube notes that accounting for inflation, California’s proposed minimum wage will still be less than 1968’s minimum wage in 2013 dollars:

“It appears likely that California will soon enact legislation to bring the state’s minimum wage to $10/hour by 2016.  Accounting for expected inflation over the next 3 years, the real value of this minimum in 2016 will likely be around $9.30/hour. To put this magnitude in context, the national minimum wage reached its high water mark in 1968 when it was around $10.60/hour in today’s dollars. So even with this proposed hike, the take home pay for a California minimum wage worker will be lower in 2016 that it was 35 years ago.  It is also of note that unlike 10 other states in the country, even with this legislation California will not automatically index its minimum wage to cost of living — subjecting its future adjustment to the vagaries of state politics.

“Current research shows that for moderate-sized increases in the minimum wage — of that sort we have experienced in the U.S. and that is expected in California — we see earnings go up for low-wage workers. There is also clear evidence that moderate-sized increases in minimum wages do not have substantial impact on jobs for low-wage workers, such as those working in restaurants, and teens. However, such increases do reduce turnover, as workers stay at these jobs longer; such reduction in turnover tend to reduce employers’ costs of posting and filling vacancies. There is also evidence that some of the wage costs are passed on to customers as slightly higher prices.”

  • University of Texas Professor Daniel S. Hamermesh believes California’s proposed minimum wage increase will increase illegal employment:

“A $10 minimum wage, raising the California minimum to roughly half the national average hourly wage, is a substantial, but not huge increase.  Nonetheless, it will kill off some low-skilled jobs in California; it will increase the number of jobs offered illegally (outside of regulated labor markets, in “sweatshops”, etc.); and, since employee benefits are not covered by the law, employers will cut back even further on the benefits they offer their workers.”

  • Miami University Professor William Even wrote a report, Unequal Harm, arguing that minimum wage increases actually disproportionately hurt black males:

“A higher minimum wage will make some workers better off and others worse off.   The workers who keep their jobs will obviously experience an increase in their hourly wage rate, but this could be offset partly by a reduction in hours worked.   Some workers will lose jobs while others might find it more difficult to find an entry-level job. While economists disagree about how large the employment effects of a minimum wage hike will be, a middle of the road estimate is that a 10 percent increase in the minimum wage will lead to about a 3 percent decrease in employment for affected workers. Many of the affected workers are relatively young and have a high school education or less. In addition to the effect on workers, consumers should expect to see employers raise prices to cover some of the increased cost of the minimum wage.   These effects will be greatest in industries like restaurants and retail establishments that employ significant numbers of minimum wage workers.”

  • Palumbo Donahue School of Business Professor Antony Davies notes that although minimum wage increases might cause negligible increases in unemployment, increases make it harder for those already unemployed to find jobs:

“Data from across states and across time are consistent with basic economic theory: raising the minimum wage causes unemployment. The story is a little more complicated than this. Small increases in the minimum wage cause small, sometimes negligible, increases in unemployment. At current numbers, what’s worrisome is less the magnitude of the impact of the resulting unemployment than the composition of the resulting unemployment.

 “Workers compete with each other for jobs on the basis of their skills, educations, experience, and price (i.e., the wage they are willing to accept). Until a worker can obtain on the job experience, a less skilled, less educated, less experienced workers can only compete on price. A minimum wage takes this last competitive advantage away, thereby creating the ‘catch 22’ of  ‘you can’t get a job without experience and you can’t get experience without a job.’

 “In short, the minimum wage is presented as helping workers at the expense of employers. In fact, it more often helps better abled workers at the expense of less abled workers.”

  • George Mason University Professor Donald J. Boudreaux believes a minimum wage increase will result in fewer low-skilled workers hired:

“Increasing the minimum wage will increase the costs of employing low-skilled workers.  The inevitable result will be reduced employment opportunities for most of those workers.  For the same reason that the government in Sacramento rightly understands that when government raises consumers’ costs of acquiring cigarettes (say, through higher taxes) consumers’ will buy and smoke fewer cigarettes, when government raises employers’ costs of hiring low-skilled workers (through minimum-wage legislation) employers will hire and employ fewer low-skilled workers.”

  • San Jose State Professor Scott Meyers-Lipton feels that an minimum wage increases will stimulate local economies low-skilled workers are more inclined to spend their salaries on basic needs:

“People across political parties support raising the minimum wage because Americans believe that if you work hard and play by the rules, you deserve a fair wage.  Importantly, the social scientific research conducted on the impact of a minimum wage shows that minimum wage increases help  low wage workers pay for basic needs. The increase also stimulates the local economy, since the people making the minimum wage spent these few extra dollars locally. Minimum wage increases do not increase unemployment or hurt small business, because they generally pass on this cost by raising prices by a few percent.”

  • Samford University Brock School of Business Professor Art Carden believes a higher minimum wage will hurt both unemployed as well as employed low-skilled workers:

“A higher minimum wage will price the most low-skilled workers out of the labor market. I expect employment reductions even if no one actually loses his or her job: firms will cut back on hours and offer fewer perquisites (free meals at fast food restaurants, employee discounts, etc). Further, potential gains to workers will fall, as people have to compete harder for artificially harder-to-find job opportunities.”

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Minimum wage in San Francisco is now $9.79 an hour via CreativeCommons