Policymakers Ignore Long-Term Consequences of California Minimum Wage Hike

Kerry Jackson
Kerry Jackson is a senior fellow with the Center for California Reform at the Pacific Research Institute.

They were warned and they knew better but they did it nonetheless. It’s become the California Way. Continually legislate, never bother to contemplate.

In 1992, economists David Card and Alan B. Krueger published a National Bureau of Economic Research paper that claimed, “Relative to stores in Pennsylvania, fast food restaurants in New Jersey,” where the minimum wage had been hiked, “increased employment by 13 percent.”

But in the decades before that study and in the decades after, economists have shown that minimum-wage laws and minimum-wage increases kill jobs, especially for the low-skilled workers they’re supposed to help, and close businesses while failing to reduce poverty rates.

Economist Arthur Laffer, author of the Pacific Research Institute’s Eureka! How to Fix California, pointed out in the Orange County Register a few years ago how the minimum wage destroys jobs. “Because,” he said, “every additional dollar that businesses are required to pay minimum wage workers hurts businesses’ profitability, businesses will hire fewer minimum wage workers.”

Kevin McNamee of Woodland Hills is no economist. As far as we know, he’s just a business owner. But he explained in a 2015 letter to the editor of the New York Times how minimum wage laws hurt employers.

McNamee wrote, “I will be moving my two companies out of Los Angeles when the lease is due to renew. I’ve been here since 1966, grew up in L.A., but I cannot make it anymore. When the city compels me to pay employees $15 per hour, it comes out of my pocket.”

“Just when small-business owners were clawing out of the recession’s devastation, the L.A. City Council hits us with [a minimum-wage hike] . . . As a result of this decision, L.A. will have a mass exodus of employers from the city, leaving increased unemployment, less tax revenue and increased city debt in its wake.”

Despite the bulk of evidence, both academic and anecdotal, policymakers continue ignoring the laws of economics and keep passing minimum-wage increases and hike already established wage floors.   Just recently, Vermont Senator Bernie Sanders introduced legislation in Congress that would raise the federal minimum wage to $15 by 2024, nearly doubling the current $7.25.  The so-called “Raise the Wage Act” has 35 Senate and 152 House co-sponsors.

Here in California, more than a dozen cities and counties in the Bay Area have changed their minimum-wage ordinances since 2012, including San Francisco, which raised the city’s legal minimum wage last year, increasing it to $13 an hour before it jumps to $14 an hour on July 1 and then $15 an hour on the first day of July next year.

Reality, though, isn’t waiting until the full minimum kicks in less than 13 months from now. It went to work right away. According to a Harvard study, there is evidence “that higher minimum wages increase overall exit rates for restaurants” in the Bay Area.

“Our point estimates suggest that a one-dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating),” though it “has no discernible impact for a 5-star restaurant,” say Dara Lee Luca and Michael Luca in Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit.

Enduring the worst impact are lesser-regarded restaurants, which “are disproportionately affected by minimum wage increases.” These are the restaurants whose business will be most negatively affected by price increases, which are one of only a few responses that companies have for minimum-wage increases, the others being a reduction in jobs, and going out of business, which will happen when the first two can’t solve the problem.

When considering this, let’s remember that there are many more 1-star, 2-star and even 3-star restaurants than 5-star dining establishments, even in the San Francisco region, where Michelin has awarded the honor to just six.

Another finding of interest in the Harvard paper is “the impact of the minimum wage as the percent increase over the state mandate, which may give a better measure of the ‘bite’ of the minimum wage.” The authors estimate that a 10-percent increase in the local minimum wage over the state’s wage floor “corresponds to an increase in the likelihood” of a restaurant exit of 4 percent to 10 percent.

And none of the city councilmen, mayors and county supervisors saw any of this coming when they increased the minimum wage in their jurisdictions. They simply legislated without considering the damage they would do. Or maybe they knew and did it anyway, which is even more inexcusable.

It’s not asking too much to expect policymakers to consider the unintended consequences of legislation before voting on it. Too often, though, our elected officials act as is they can’t be bothered.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

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