As Governor Jerry Brown signs the new minimum wage increase law this morning, many in the business community are studying the proposed temporary pause mechanism built into the bill that is supposed to reassure businesses. It does not.
The mechanism is power in the hands of a governor to pause the minimum wage increase during economic downturns. There are two scenarios in which a governor can hit the pause button.
It is important to note that this power granted the governor is optional. Even in a recession political pressure could prevent the governor from pulling the trigger.
The first trigger is pulled when nonfarm employment for a 3 or 6 month period declines and sales and use tax has dropped over a 12-month period compared to a previous year, all these measurements to be taken at the end of the budget year in June.
The second trigger is based on state budget projections. If the Department of Finance projects a deficit in the then-current fiscal year or in either of the following two fiscal years the governor can pause the minimum wage increase. The budget trigger can be used a maximum of two times.
According to a quick review by the California Business Roundtable’s Center for Jobs & the Economy, this trigger power, which the business group labels an “Off-Ramp” provision, if it had existed during recent past recessions, would have complicated economic conditions as California was trying to pull itself out of a recession. The analysis says the minimum wage increase would have resumed after the pause while unemployment was still high.
From the Roundtable’s Center for Jobs & the Economy brief examining the last two recessions:
The 2001 Recession—
Most of the country went through a relatively short 2001 recession, but in California it was extended due to Silicon Valley being the epicenter of the dot.com bust and spiking energy prices as a result of the state’s regulatory and other energy policy decisions. While the triggers would have provided a one-year delay in 2002, the minimum wage would have continued its annual increase as unemployment continued to rapidly rise from an average of 5.4% in 2001 to a peak of 7.3% in 2003.
The 2007 Recession–
The minimum wage increases would have resumed in 2012 when unemployment still averaged 10.4% or even earlier in 2011 when unemployment averaged 11.7%. Most importantly, the minimum wage increases would have kicked back in during the critically important 5-year recovery period where California slowly struggled to regain the two million jobs lost throughout the state.
The brief also noted how the resumption of the minimum wage could put California at a disadvantage with other states: “the state will then resume raising its wage level above other states just as the recovery begins—a time when competitive factors will be particularly crucial to how quickly the state can restores its economy.”
For the full Center for Jobs & the Economy brief go here.