Does California’s Minimum Wage Make Economic Sense?

David Kersten
David Kersten is an independent political consultant who lives in the Bay Area. Kersten is also an adjunct professor of public budgeting at the University of San Francisco.

A new study on California’s minimum wage policies raises serious questions about whether the state’s minimum wage makes good economic sense.

The April 2019 study, titled “The Minimum Wage: An Analysis of the Impact on the Restaurant Industry,” was prepared by the UC Riverside Center for Economic Forecasting and Development for the California Restaurant Association.  

According to the study, California’s minimum wage is on path to increase annually to $15 per hour in 2022—50% higher in real terms than it was in 2012.  

“This will, of course, benefit minimum-wage workers.  But a higher minimum wage could also create distortions in the labor market, potentially causing employers to cut employee hours, and for fewer job opportunities to arise for low-skilled and teenage workers.  Policy makers must consider these issues and ways to mitigate their effects, otherwise they risk causing more harm than good to the economy,” states the April 2019 report.

The report examined 57 metropolitan regions across the United States, including but not limited to California.  It sought to account for changes in minimum wages made by many states to analyze how such changes have impacted employment trends in the industry, as well as earnings and the number of restaurant establishments operating in a given area.  

The study utilized federal census data and data from the American Community Survey from 2005 to 2017 to more closely look at the type of employees being hired.  

“Data analysis suggests that while the restaurant industry in California has grown significantly as the minimum wage has increased, employment in the industry has grown more slowly than it would have without minimum wage hikes,” states the study.

“The slower employment is nevertheless real for those workers who may have found a career in the industry.  And when the next recession arrives, the higher real minimum wage could increase overall job losses within the economy and lead to a higher unemployment rate than would have been the case without the minimum wage increases,” concludes the report.

The report issued a series of very interesting specific findings on the economic impact and costs of the State of California’s minimum wages policies.

“The State of California has a vibrant, growing restaurant sector.  Over the period 2010-2017, total employment in the state’s economy grew by 21% compared to 27% and 35% in the full-service and limited-service restaurant sectors respectively,” according to the report.

“At the same time, there is evidence that hikes in the real minimum wage may have slowed the rate of growth in these sectors.  There is a statistically significant negative impact on employment growth in both the full-service and limited-service restaurant industries,” according to the report.

Furthermore, the report also found that “the impact of the minimum wage hike is greater in lower income communities than higher income communities, presumably because restaurants in high-income areas can pass on the additional costs to customers more easily.”  

The study’s economic model also found that the industry added significantly less jobs due to the minimum wage increase, and the overall increases in employee take home pay were very marginal compared to the amount of the minimum wage increase.  

“According to the model, 63,000 full-service jobs would be added over the period 2017-2022 if the minimum wage increased at the rate of inflation, rather than the projected increases.  The model suggests that there would be 30,000 fewer jobs in the industry from 2017 to 2022 as a result of the higher minimum wage. Over the period 2013-2022, therefore, the number of new jobs in the full-service industry will grow by 120,000, but would have grown by 160,000,” according to the report.

For limited-service restaurants (i.e. fast food), a 20% increase in the minimum wage only lead to a 4.2% increase in annual employee earnings, while the same increase leads to a 2.7% bump in the full-service industry’s average pay.

“One explanation for a relatively small increase in wages is that lower paid workers end up working fewer hours as a result of the higher minimum wage, thus offsetting the increase in their hourly rate,” according to the study.  

Perhaps alarming for small businesses, the study concludes that “the minimum wage doesn’t just reduce employment growth, it also reduces growth in the number of restaurants in a local economy…This implies fewer restaurants than would have been the case and a consolidation in the industry for larger establishments—those that represent major national chains at the expense of small restaurants.”

Overall, the report provides a good analytical and empirical framework for examining the impact of California’s minimum wage on restaurant workers.

As noted in the literature review, there is a well-established academic literature that addresses the minimum wage, so the debate about whether raising the minimum wage leads to a reduction in employment will undoubtedly persist.  

This study found that raising the minimum wage leads to a significant decrease in both employment and employers, and only marginally increases wages for those workers who are lucky enough to keep their jobs, albeit with reduced hours.  

The findings of this study reinforces what economic theory, as well as common sense, already shows us to be true.   

Raising the minimum wage by 50% over a ten-year period will have a dramatic negative economic impact on both employees and employers.  

Yet somehow a cadre of past researchers, starting with Card and Kreuger in 1993, issued empirical studies that suggest the minimum wage increases had “almost no effect on, and in some cases a higher minimum wage could actually increase employment,” according to a brief literature review included in the report.  

This is akin to saying that higher taxes on a product or service, actually leads to an increase in consumption of this product or service in some cases—an economic anomaly and a conclusion that should be viewed with great skepticism.

This new report is intended to help California policymakers and advocates for the poor understand that government intervention into the economy has unintended consequences that often outweigh the economic benefits provided by such policies.

Moreover, the negative economic impacts of these unintended consequences often worsen over time, creating the apparent “need” for further government intervention, which continues to make an existing problem even worse.  

In California, as noted in this column regularly, we see this political rule play out on a number of key issues including housing, rent control, taxes, and health care, to name a few issues.      

As for the state’s rising minimum wage, if state policymakers want to help low-income workers the best solution is not more wage controls, it is economic policies that serve to foster the conditions for wage growth and economic growth in California—that will ultimately benefit all low-income workers far more than any other policy of government intervention.    

 

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