Why The $15 Minimum Wage Will Cost California 400,000 Jobs
Author: Michael Satlsman
Publication Date: December 2017
Topics: Minimum Wage
In the new year, less-skilled workers across California will face an old, familiar threat to their employment: A soaring minimum wage.
In 2016, Gov. Jerry Brown signed a bill that put the state minimum wage on track to reach $15 per hour by 2022. The next increase—from $10.50 to $11.00—is scheduled for Jan. 1, 2018. If you’re a business in one of thirteen different California localities–from Mountain View to Milpitas, and from San Jose to Santa Clara–the required wage floor will rise even higher.
When he signed $15 into law, Gov. Brown seemed to understand that the increase was a bad idea, acknowledging that “economically, minimum wages make not make sense.” Today, California’s good intentions are catching up with it.
The warning signs started early; dozens of stories chronicled businesses closing, cutting staff, or leaving the state. A rash of restaurant closures in the Bay Area led one food-industry publication to describe it as a “death march.” Even child-care providers were hurt. (Some of the closures are featured in the video below.) A team of economists at Harvard Business School and Mathematica Policy Research determined that the rising minimum wage in the Bay Area contributed to these closures.
A new study released this week by the Employment Policies Institute (EPI), where I serve as managing director, takes a longer-term look at California’s minimum wage experiment. The state’s minimum wage began to deviate significantly from the federal standard in the late 1990s, a trend that continues today. David Macpherson of Trinity University and William Even of Miami University analyzed employment data over this time period, with a specific focus on industries with a higher percentage of lower-paid employees. They find that a 10% increase in the minimum wage causes a nearly 5% reduction in employment in these industries.
Based on the state’s historical minimum wage experience, they estimate California will lose approximately 400,000 jobs by 2022 when $15 is phased in. Retail and food service employees are hit especially hard by wage increases; nearly half of all job loss comes from these industries.
None of this should come as a surprise. The minimum wage is one of the most-studied topics in economics, and the consensus view of the research is clear: Raising the minimum wage reduces job opportunities. A summary published in late 2015 by Federal Reserve Bank of San Francisco put it this way:
Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss. Coupled with critiques of the methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.
Job cuts in the service industry don’t happen because businesses are mean-spirited. Rather, it’s because they’re caught between price-sensitive customers who can always stay home if a burger is too expensive, and narrow profit margins that provide little room to absorb the cost of a mandate. The only option is often to reduce staff, perhaps opting for self-service technology that takes the place of a job once done by an employee.
The empirical consensus has failed to sway politicians inclined to support a wage hike for ideological reasons, or editorial boards at papers like the New York Times. They take comfort in “reports” from sympathetic researchers from the University of California-Berkeley, who were caught this year working closely with politicians to undermine credible research on minimum wage consequences. Meanwhile, the victims of the policy–small business owners, young disadvantaged jobseekers, and nonprofits–suffer in relative silence. In 2018, it’s time to tell their story.