By Tom Cushing
Minimum Wage Follies, Part 2 – what can we expect?Uploaded: Apr 5, 2016
As the LA Times reports, the minimum wage law signed Monday by Governor Brown will: raise the state's hourly minimum wage from the current $10 to $10.50 on Jan. 1, 2017, then to $11 the following year, and increase by $1 annually until it hits $15 in 2022.
Businesses with fewer than 26 employees will get an additional year to comply, and Brown and his successors could delay the increases by one year in the case of an economic downturn. Thereafter, the minimum wage will increase each year based on an inflation index.
So, other than the sky not falling (except, perhaps, on a few unfortunate souls in the PW Town Square), what can reasonably be expected from this measure, as it takes effect over the next several years?
Who’ll be helped? Less than 4% of the CA workforce of about 19 million (about one-million of whom are unemployed) earns the current state minimum wage of $10 generally (it’s higher in several cities). They’re in. In addition, the rise to $15 (about $13.60 in today’s dollars if inflation moves like the last six years) will bring many more workers directly under its terms. In a national study, Pew Research estimates that about 30% of hourly workers are paid within $3 of the minimum (so that’s maybe 15-20% of the overall labor force, depending on location). For this blog’s modest purposes, let’s assume that California roughly resembles the national economy. Many of those folks will also get the mandated raise, or one that keeps them a bit above the then-current minimum as it rises.
Add to that group the workers in jobs like Under Assistant West Coast Promo Man* (actually, ‘retail assistants’) for whom shaky arguments are currently made that they are “exempt” managers to whom these hourly-worker rules don’t apply. In CA, to pay them salaries (and thus also avoid Overtime pay), those pay rates must be set at two-times the min wage. These folks will thus either get significant raises, or they’ll be converted to the hourly roll and probably get some OT. (Note: correction from 1.5 to 2X min wage, 04162015 -- prior miss-recollection TFC).
There is a traditional bugaboo that claims that many min wage jobs will be lost. While that’s theoretically possible, reality is more complex than Econ 101. UCBerkeley’s study of the LA increase to $15 suggested the effect is essentially trivial: a 0.2% loss of jobs to the suburbs, in a labor force that’s growing by about 2.5%/year. And note that those jobs weren't really lost -- they would move to the ‘burbs because it’s easy to cross that boundary, whereas fortress California’s borderlands are mostly inhospitable. In a statewide context, the LA ‘burbs become Las Vegas, Lake Havasu and Yuma. Would you travel there for your next infection with e-chipotli?
Who’ll be hurt? Consumers, a little. This is a very uneven effect, as min wage jobs are concentrated in the hospitality and retail sectors, plus some educators and a few laborers in construction. The overall contribution of labor to product cost is about 23%, and in businesses like fast food and other retail it averages more. A significant increase in a fraction of those labor costs does amount to something – an estimate from Purdue University pegs that number as about 4% of your 2022 Whopper, with cheese.
Taxpayers, maybe. Here’s where things start to get sketchy. The State believes that its personnel costs** in 2022 will increase about $3B, in a likely budget of $130B+. However, there are revenue effects as well, from both income and sales taxes. The Legislative Analyst essentially punted the estimate, but it seems likely that the income tax effect may be slightly negative, more than offset by sales taxes paid by low earners with somewhat deeper pockets, spending nearly all their raises on goods and services that cost a little more. There may also be a SNAP (food stamps) impact, as some workers exit eligibility for the subsidy.
Businesses. Here, it’s crucial to recognize both the cost effect, which is easy, and the price increase possibilities, which are more difficult and individual to each business. Most businesses do not pay any employees the minimum wage, now or in 2022. But, in sectors like retail and construction that do often pay the minimum, labor costs will rise significantly.
That said, whether profitability takes a hit will depend on whether the businesses can raise their prices to offset higher costs. Recall that Everybody’s costs have gone up, so this isn’t Big Macs vs. Quesalupas – it’s fast food vs. bringing a sandwich from home (the dismal econ mavens call it ‘cross-elasticity of demand’ which is really just fancy talk for substitutability). It seems likely that there will be a mild uptick in lunch box sales, although they’re probably made elsewhere.
Finally, some competitive businesses in every market are run better/more profitably than others. This change in everyone’s environment will favor adaptation and efficiency, and some dinosaurs will die-off. The min wage hike may be the asteroid that puts them under, their places to be taken by others.
The Valley vs. the Coast. Economic conditions vary dramatically in our fair corner. The average wage for all workers (including salaried) in SF/Oakland is over $32/hour, whereas in Visalia it’s $18.72. All these noted effects will be magnified in the hustings, and that concern led the sole Dem legislator to vote against the measure. How the balance of helped vs. hurt will come out is everyone’s guess – it’s clear, though, that the impact will be greatest in the lowest wage regions.
Non-profits: this sector ranges from the gargantuan and ridiculously profitable hospital sector to tiny home-care or animal sheltering enterprises. Kaiser will be immune, but the shoestringers who do it for the passion will be slammed. Many pay the minimum and depend heavily on donated support – they’re going to need more of it, as well as more volunteers.
Finally, does any of this mean that we’ve ‘solved’ income inequity in California? Not at all, as there are both absolute and relative perspectives. On the absolute scale, this new law significantly aids and elevates those at the bottom, whose economic plight is worst. But if you examine the income deciles (each 10%, from 1-10 to 90-100), it’s actually the folks smack in the middle range whose ‘real’ incomes have yet to even return to pre-2008 levels. The implications of that stat are many, and to be clear, nobody is proposing any kind of similar solution, at all. It is, however, an important phenomenon – especially if you’re in one of those deciles.
Indeed, it’s a good thing for somebody else that I’m essentially an Uber-driver contractor on this blog – I hesitate to tote the hours, but am pretty sure that even the federal minimum wouldn’t legally compensate this edition. Whew. Next week, we’ll return to lighter fare – maybe, campaign finance?
* Ten-point toss-up – in the US, that song was the B-side of what Rolling Stones hit? No googling! Further bonus (my, my): what was the B-side of the same hit 45 in the UK?
** Actually, there are not many government workers who toil for the minimum, but the state does underwrite services like some home health care, whose workers do make the minimum.