On Wage Mandates, the Devil’s in the Details

Original Article: http://www.ocregister.com/articles/alejo-510505-wage-minimum.html

  • Author: Michael Saltsman

  • Publication Date: May 2013

  • Newspaper: Orange County Register

  • Topics: Minimum Wage

After backing three failed attempts to raise the California minimum wage in the last two years, California Assemblyman Luis Alejo (D-Salinas) has finally caught a break. A party-line vote in the Assembly’s Appropriations Committee last week ensured that Alejo’s proposal will have its day before the Democrat-dominated legislative body before the month is out.

The California minimum wage currently stands at $8 an hour, and Alejo would like to raise the wage in a series of steps to $9.25, linking that value to inflation so that it rises automatically in the future). The Assemblyman says his bill will reduce poverty and have a negligible impact on the state’s entry-level job market. But a closer look at Census Bureau data shows why he (along with the Californians he represents) is destined to be disappointed.

Alejo’s first problem is that his legislated raise isn’t well-targeted to the families he wants to help. Just 7.2 percent of Californians covered by a $9 minimum wage (a midpoint between Alejo’s proposed increases) are single parents. By contrast, 45 percent are young adults and others living at home with a family or relative, and another 18 percent have a spouse that also works. In other words, nearly two-thirds of people receiving a raise aren’t the sole or primary breadwinner in their household.

The average family income of these “minimum wage” employees is $45,266, or more than two times the poverty rate for a family of three. This imprecise targeting is one reason why–according to a study from economists at Cornell and American University–California and the 27 other states that raised their minimum wages between 2003 and 2007 experienced no associated reduction in poverty rates.

Another problem with Alejo’s wage hike proposal is the unintended consequences it will create for industries that pay the minimum wage and their young, less-experienced employees. In California, roughly one-quarter of employed young people work in the retail industry; 35 percent work in leisure & hospitality (e.g. restaurants, hotels, and amusement parks). Unlike, say, a major Hollywood movie studio, these businesses squeak by on narrow profit margins and are unable to simply absorb higher labor costs.

Some activist groups have suggested that employers can just raise prices. But as any savvy shopper knows, higher prices mean fewer sales—leaving a business worse off than it was before. That leaves employers with one regrettable option: Do more with less. Instead of hiring additional grocery baggers, have the customer bag groceries themselves; instead of hiring additional bussers, have waiters and waitresses clear their own tables. Past economic estimates of employers’ responses to higher labor costs suggest that the Alejo bill will cost the state at least 11,500 entry-level jobs.

This should be gravely concerning to Alejo and his fellow legislators. California already has the nation’s highest youth unemployment rate, at an average 33.1 percent. Instead of helping these young people get their start on the first rung of the job ladder, Alejo’s bill will only put it further out of reach. Research from economists at the University of North Carolina and Welch Consulting suggests that even a six-month spell of unemployment now can reduce a young person’s future earnings–the equivalent of forgoing a quarter-year of school.

If Assemblyman Alejo really wants to help California’s working poor, he should shelve the minimum wage bill and instead consider a state supplement to the federal Earned Income Tax Credit. The full-time minimum wage for a single parent family with two children is already $10.50 in California due to this federal credit. A modest boost to the federal credit in Sacramento would raise paychecks even further without raising additional barriers to employment for the state’s young people.

I hope Alejo will take my advice. But if not, he’d better be ready with an answer next summer for the angry parents in his district who want to know why their kids can’t find work.

Michael Saltsman is research director at the Employment Policies Institute