California politicians and labor leaders may reap political rewards and public accolades for their recent wage agreement, but this unprecedented hike should not be emulated elsewhere as it will be disastrous for small businesses, low-skilled workers, and low to middle income consumers.
Last week, California Gov. Jerry Brown signed into law a hastily passed incremental wage hike to eventually bring the state’s minimum wage from $10 to $15. Supporters and wage activists have praised this mandate as a matter of fairness and economic justice — and are now pressuring other states to follow suite.
In reality, this so-called extension of “fairness” and “justice” will irreparably harm small businesses, consumers and low-skilled workers in the already increasingly feudal Golden State.
Minimum wage increases in California and elsewhere are promoted as a means of lifting workers out of poverty. This desirable goal often blinds the public to the reality that mandated wage increases not only fail to reduce poverty but also cause social and economic harm.
Employers, faced with additional labor costs imposed by mandated wage increases, have limited options. They can accept lower profits, increase their prices, reduce the number of current and future employees (or the number of hours employees work), or close their doors.
While minimum-wage advocates contend that employers will be able to pay for additional costs with their own profits and that wage increases will not lead to higher consumer costs or unemployment levels, such claims ignore the bulk of economic research and common sense.
If mandating higher wages alleviates poverty without negatively affecting inflation or employment, why stop at $15? Why not mandate an even higher hourly wage, say $20, $30 or even $100 an hour?
Any rational person would recognize that when something is more expensive, people can afford less of it. As the Independent Women’s Forum’s Carrie Lukas points out, even leftist supporters of minimum wage increases seem to understand this logic when it is used to justify policies they support “such as higher taxes on cigarettes, gasoline, alcohol and other items they want to discourage people from buying.”
Businesses operate under the same economic constraints as consumers, and — contrary to the claims of many advocates of higher minimum wages — most low-wage workers are employed in industries with narrow profit margins, such as retailers, restaurants or other small businesses.
These businesses’ first line of defense against rising labor costs is to offset those costs by increasing prices. The relationship between mandated wage increases and higher consumer costs has already been demonstrated in the cities and states that have recently implemented such mandates. Several small businesses whose services I use on a regular basis, such as my neighborhood car wash, have already raised prices in response to California’s previous wage increase that went into effect this past January. Increased costs in goods and services effectively cut the paycheck value of all consumers, including those receiving higher pay from newly imposed wage mandates.
While many goods and services become more expensive under new mandates, not all businesses have a consumer base that is willing or able to pay increased costs.
Large, national corporations — such as Starbucks — may have the resources to adjust to higher employment costs, but most of their smaller, local competitors do not have the same luxury and will be forced to scale back on employment or pushed out of the market altogether. Cities that have recently imposed significant wage hikes, such as Seattle, San Francisco and Oakland, are already showing preliminary evidence of higher costs, a decrease in low-skilled jobs and increased levels of business closure.
If the goal really is to help those in poverty, then minimum wage advocates should take note: Most individuals living in poverty are poor, not because they work a low wage job, but because they lack access to consistent employment or are out of work all together.
Minimum wage hikes only exacerbate this problem, by making it illegal for such individuals to seek gainful employment below a newly imposed rate. This limits the upward mobility of those with few skills, who are often seeking to establish credibility or gain work experience, which is far more valuable in the long run than their initial nominal take-home pay.
As Thomas Sowell has observed, “There is nothing mysterious about the fact that most people start off in entry level jobs that pay much less than they will earn after they get some work experience.”
Consequently, when low-skilled and inexperienced workers — a large percentage of whom are teenagers or minorities — are priced out of jobs through minimum wage laws they lose not only current compensation but also the opportunity to gain valuable experience that will allow them to demand higher wages in the future.
If lawmakers truly care about economic justice, they should stop pushing policies that increase poverty and lead to downward mobility — both problems that have steadily increased in California over the past two decades under the political leadership of “compassionate” progressives.
A growing and free economy — along with access to quality primary and secondary education options — is far more likely to increase individuals’ lifetime earnings than any arbitrarily imposed wage mandate.