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California’s Minimum Wage Increase Hurts Those It Claims to Help
On March 31 the California Senate sent on to Governor Jerry Brown a bill that makes it against the law for anyone who cannot produce more than $10.50 per hour to be employed in the State of California beginning next January 1. This figure will be raised gradually over the next five years until it reaches $15 per hour by January 1, 2022. The bill passed the Senate 26-12, and had earlier passed the House on a vote of 48-26.
One might ask why a state would want to exclude its low-skilled workers from participating in the labor market. Why would a state where the unemployment rate for 16- to 19-year-olds is 20.5 percent, and where labor force participation for this age group has declined from 36 percent to 28 percent since 2008, want to exclude those cannot produce $15 per hour in their first job from acquiring labor market skills?
Assemblyman Sebastian Ridley-Thomas, Democrat from Los Angeles said during the floor debate: “This is an argument about economic justice. Justice is not something that can be negotiated or compromised.” What is the economic justice when you can get a first job if you have enough talent or background to produce $15 an hour, but I can’t because I attended an urban Los Angeles school that did not provide me with the skills to accomplish that?
In 1927, the noted Austrian economist Ludwig von Mises, in his book Liberalism in the Classical Tradition, made the obvious point that employers cannot pay workers more than the value that the worker adds to production. It should be pretty clear that if by hiring you I gain $8 per hour, I cannot pay you $10 per hour. To do otherwise is a good way to go out of business.
Clearly the California Assembly and Senate must know that you cannot by fiat increase wages, otherwise, why stop at $15 per hour? Raising the minimum wage to $300 per hour would ensure that anyone working full-time would earn $600,000 per year. This would be a wonderful world. The fact that the Legislature did not increase the minimum wage this much shows they know that most of their friends would lose their jobs at such a minimum wage.
Why should legislation that raises the minimum wage be so popular when it harms many of the very people whom the law purports to assist? This is another case of what Frederic Bastiat pointed out more than 160 years ago, that of the seen and the unseen. When the minimum wage is increased, at least in the short run, many people will see an increase in their wages. But what is not seen are the job losses that occur as machines and technology are substituted for low-skill labor. What is not seen are the jobs that do not come into existence because of the artificial rise in the cost of hiring low-skill labor.
The recent Economic Report of the President discusses how low-paying jobs are particularly vulnerable to automation. One can take a look at a YouTube video to see a robot that makes hamburgers in response to an increase in the minimum wage. Already many restaurants, an industry that relies heavily on low-skill labor, are using kiosks where you order your own food, and require you to get your own drinks. Raising the minimum wage will simply accelerate this process.
Some of you may recall when there was something called service stations. When you drove up, a young attendant met you and pumped your gas, checked your oil, and washed your windshield. This was a starting job where you could learn the basics of coming to work on time, interacting with customers, etc. These jobs no longer exist as government has focused on artificially setting the price of low-skill labor.
Mises correctly pointed out: “Wages in general cannot be pushed above the height that they would normally occupy in a market unhampered either by government interference or other institutional pressures without creating certain side effects that cannot be desirable for the worker … there is only one thing that can raise wages: a rise in the general productivity of labor.”
It is important to point out who loses from increases in the minimum wage. The direct losers are the young unskilled. Unfortunately in California, Hispanics and blacks from inner-city neighborhoods will be particularly affected. Who gains from the increase are labor unions, as their members are generally high-skilled and are, along with machinery, substitutes for low-skill labor. As the price of low-skill labor is increased by law, the demand for high-skill labor increases, raising wages in that sector.
If you truly wish to improve the living standards of the poor, then you must increase their productivity. Allowing them to enter the labor market and gain new skills, as well as improving the education system, will move in the correct direction. Depriving California’s unskilled of the ability to enter the labor market will only make things worse.
Published in General
When asked if they favor a minimum wage increase, politicians should echo Thomas Sowell: “I can’t, and neither can my opponent. The minimum wage is always zero.”
This is a truth that’s very hard for people to accept, but the only chance we have that it might sink in with the general public is if we’re concise when we express it. Instead of a long and boring economic dissertation, make our opponents refute a pithy assertion.
I’m always amazed that out of one side of their mouth they say “economic justice”, and then they make a gradual increase. If it is a matter of justice it should happen now.
And expect to hear about “fight for $20” in 2022.
Exactly!!! Add to that the OP’s point….why not $100/hour?
This is somewhat old news since many big municipalities in CA have already enacted similar increases.
In SF, the reaction was predictable. A number of small businesses actually survived the first leap to $12.25 thanks to the fact that SF is overrun with overpaid residents willing to overpay for goods and services at their beloved local small business. But that really only applied to the types of local small businesses that overpaid people enjoyed visiting, so a number of mom-and-pop convenience stores/hardware stores/etc. are on their way out.
Meanwhile, a number of fringe businesses (used bookstores, concert houses) beloved by hipsters immediately shuttered their doors, provoking a comical backlash from said hipsters against the “corporate greed” of used bookstore owners who had already just barely been scraping by.
In short, the Bay Area – i.e. the heart of California liberaldom – has already done such a good job of eliminating the middle class that raising the minimum wage probably won’t have a huge effect for a while.
Most people earning the minimum wage have already left or were already planning to do so; genuine middle class earners who rely on stores staffed by minimum wage earners have also been leaving in droves already, while the rich can easily afford to pay the higher prices associated with this hike (if they weren’t already patronizing well-paying boutique businesses anyhow).
Unfortunately, many Californians (and New Yorkers) are about to discover the hard truth that the real minimum wage is Zero.
I love this post, because it makes several points that I have been saying to people for years, but it makes them so much better and clearer that I could have. I shall shamelessly steal from it in my future conversations.
This is absolutely beautiful. Looking at it from this perspective reveals the folly.
Indeed. Any politician – particularly one participating in a presidential debate – who advocates a minimum wage above zero should be asked how he arrived at that particular number and why he did not choose a higher one. Eventually, he will be forced to admit that an artificial minimum wage can put people out of work. If $300 worth of poison is fatal, how is $15 worth healthy?
I saw this in Paris, and I said to myself, “It’s just a matter of time before it becomes widespread in the U.S.”
Austin’s metro area population hit 2,000,000 today, and is projected to hit 3,000,000 by 2030. I’ll take the “under” on that, now that California has turned on the “turbo exodus” function. Welcome to Texas!
Also, this exciting new social experiment has been brought to you by the geniuses that brought you “busing” in the 1980s. THAT was a joy. Wonder why they stopped?
Let’s review: Progressives aid and abet corrupt teachers’ unions that operate government schools for the benefit of the teachers and administrators – not the students. The students leave school or graduate from high school with skills insufficient for anything other than low-skilled labor. The progressives then set an artificial floor on wages, thereby making it impossible for these people to get a job. Finally, the progressives blame the rational, logical, and foreseeable actions taken by businesses (e.g., fast food kiosks) on the businesses themselves, rather than on the corrupt, incompetent teachers or on the economically innumerate legislators.
Well, except for illegals who will get paid under the table.
Oh wait, not ” illegals”. “Undocumented Americans”…..
So tell me, does the employer get fined or jailed for hiring a person below minimum wage or does the employee get fined or jailed for working below the minimum wage? Being as it is now against the law. Federal law is $7.25
And if you’re already making $15/HR what’s going to be your reaction if you’re not making $20 in 5 years?
Don’t wage hikes just get passed on to customers in the form of higher prices? So whether a business stays in business then depends on how elastic demand is, and how much access consumers have to lower priced competition.
In some cases this does mean businesses close, but in other cases it just means prices go up – California can’t outsource its janitorial services to Texas, just for example. Californians can’t routinely drive to Texas to buy a cheaper hamburger. Some jobs are not mobile. My question is which ones and how many of these are minimum wage jobs.
In California they can just hire illegals and pay them under the table. VERY elastic.
There is a simple government fix for the lost jobs. Just pass a bill saying any decrease in the number of your employees after passage of the higher minimum wage law will be subject to a $20/hr tax per lost employee. State get higher taxes. Dems can demagogue the issue as ‘protecting the jobs of the most vulnerable’. And an Exit Tax for any business leaving the state. And a Small Business Failure Tax for any business that goes belly up cuz they can’t stay in business. And a Bankrupcy Tax for any business that files for bankrupcy. There seems to be no limit on the taxing authority of the State anyways.
There will be plenty of PTA moms in the OC up in arms over this. My businesses provide a lot of part-time work to high school and college kids who want to contribute to their up and coming debt. In addition, they learn some good entry level business skills and stay out of trouble.
We have an unusually high percentage of family members who work in our stores and we’re proud of that. Our managers recruit brothers and sisters and cousins to work for us and parents stop my husband in the street to thank him for hiring their kids.
The mother of one of my favorite employees dropped by one of my stores to inform our manager that she has two more kids in the pipeline.
Why is the state of CA trying to ruin such a productive process?
This has been my argument. If 7.25 goes to $15 is the guy already at $20 not getting a pay cut? Should his pay not go to $40 so he keeps his place in society? Shouldn’t the guy making $50/HR not now go to $100/HR? We keep talking about fair. Is this not fair?
Some economists claim that the resulting price rises will have greater impact on the poor than on the wealthy, as the poor buy more from businesses that have more workers at the low end of the pay scale. A few even suggest that the net effect of a minimum wage hike will be net negative for poor people who are able to keep their jobs, as the cost of goods and services they buy will rise more than the increase in their incomes.
Opponents of minimum wage increases usually cite the loss of employment, which is quite true. But the other huge effect, which also hurts the poor, is the price inflation – which also falls most heavily on the poor. The higher minimum wage gets passed on by businesses to customers, and those price increases fall most heavily on patrons of low cost / low price businesses. Minimum wage workers don’t shop at Gucci’s. They shop at WalMart. They eat at McDonalds. Even the minimum wage workers who keep their jobs will not see any increase in their purchasing power because they, in the end, are the ones who will be paying for the higher minimum wage.
On the other hand, the silver lining is that this may be the most effective means of enforcing immigration laws we have seen for a long time. Who is going to pay an unskilled immigrant $15 an hour, when there is a huge pool of unemployed citizens available? Eliminate the market for low skill, low paying jobs, and you eliminate the magnet drawing illegal aliens looking for work.
I am not too worried about minimum wage increases in jurisdictions in which I don’t live. I am guessing that in many places in CA the market wage of entry-level low skilled jobs is already greater than the $10.50 – except for illegal immigrant labor. The market wages of the small city I live in is higher than the minimum wage. However, in a town 25 miles away the market wages are significantly lower because of the much lower cost of rents.
National minimum wages make no sense due to the huge variation in cost of living across the country.
Common question, Z and the answer is no. Consumers are far savvier than ever before. The employer and potential employees take the hit.
But the CA government isn’t going to enforce it for illegals, they now have more rights than us. Laws like this are yet more reason to hire illegals, who are perfectly willing to work for far less. I actually wonder if this is the politicians’ real motive.
The CA government will enforce it against the employers of illegals. They think they’re helping the workers, and punishing the evil employer. They love helping the workers and punishing the evil employer.
Maybe, but I’d rather they enforce the law against hiring illegals in the first place.
Me too. But they don’t, and since we’re talking about state government here, they can’t. Enforcement is exclusively federal, as Arizona learned when it tried to enforce the immigration laws. In any event, we shall see what happens to illegal immigration in California under the $15 / hour minimum wage. I think it will drop significantly. Oh, and if the new minimum wage also gets rid of some of those farmers who are planting monsoon crops in the desert, and thereby causing California’s “drought,” that would be a nice unintended consequence as well.
Imagine a woman who dropped out of high school and lacks any type of formal job training. She begins to collect tchotchkes and collectibles and to sell them at flea markets for amounts less than $15. The woman has a dream of earning enough to rent a storefront where she could sell these items and also other items including furniture.
Now, imagine that the Democrat-controlled legislature “comes to her rescue”. The legislators decide that it is unfair to value her tchotchkes at less than $15. Henceforth, there will be a floor of $15 on the price of such items sold at flea markets. The woman in our example has no access to items that have a market clearing price of $15 or above. She was hoping to build her business so that she could acquire more expensive items to sell, but the legislature has dashed her dream. It has priced her tchotchkes at a level at which no one is willing to buy them. As a result, she folds her business and goes on welfare.
We frequently speak of “goods and services” and seem to understand that one’s labor (a service) is very much analogous to a good. If you were to present the sad story of the tchotchke seller to a progressive, chances are that he or she would see the folly and destructiveness of a minimum price for those goods.
Why do they not see the folly of setting a minimum price for labor?
If she sells 15 of them within the hour for $1 each, she will meet the law of $15 an hour, no? I have a house full of tchotchkes and can’t even give them away. A Perot antenna ball anyone?
I don’t welcome the economic pain on those who will receive it, but this is exactly the way our federal system is designed. California’s duly elected representatives have seen fit to enact this law and Californians can live with it. We who are not in CA can profit by their example.
When I worked in the bay area 10 years ago, one could easily see the underground Chinese/Mexican economy that was developing to offset the crushing web of rules which governed getting construction work done in the bay area. This will only proceed to accelerate the underground market and automation.
When a job cannot be outsourced as you describe, the demand for it can be reduced (waste collection by employees rather than janitors e.g.) and/or…. politically connected consortia of special interests can lobby the state assembly for carve outs for lower wages for their employees. That gives them an advantage over the apolitical business owner which tends to favor larger firms/entities.
Organized labor will likely be the first to ask for a starting wage carve out to pay unskilled workers less than $15. The exchange will be that the worker must pay union dues out of the lower wage they get. Theoretically then, the take home wage of these workers could go down below what was previously the minimum wage of $10.