Governors Jerry Brown in California and Andrew Cuomo in New York have recently signed into law bills that call for a $15 minimum wage. On both sides of the country, the legislation has raised passionate debate on both sides of the issue.
Proponents say the raise in minimum wage will benefit low-income families and raise the standard of living for disadvantaged populations. Opponents say the law will cripple some businesses, particularly smaller businesses, curb economic growth, and stagnate job creation.
The National Federation of Independent Business/California claims 90 percent of its 22,000 small-business members oppose the state’s wage hike. The results, the NFIB/California claims, will be calamitous, resulting in layoffs and price increases. The American Action Forum estimates nearly 700,000 jobs lost in California alone.
According to a New York Times article, the risk of job loss is low in high-tech cities such as San Jose and San Francisco, both of which have benefited from the high-tech boom in the Silicon Valley. For cities like Los Angeles, Fresno, Bakersfield and San Diego, the risks are, at best, uncertain. These cities have much lower wages to begin with, meaning the reliance on low-income labor will be more acute than in well-heeled areas.
The Times article quotes Craig Scharton, a restaurant owner in Fresno, whose business is already hurting from a minimum wage increase from $9 to $10. The wage increase has caused Scharton to reduce his staff from 18 in 2014 to 12 today. He has had to close the restaurant on Mondays and Tuesdays.
Seattle recently phased in a $15 minimum raise. The results, so far, are not a good omen for California and New York.
The city had seen a steadily progressive increase in employment from 350,000 in mid 2009, during the height of the Great Recession, to about 405,000 in April 2015, when the wage hike went into effect. Since then, there has been a loss of about 5,000 jobs, losing more jobs in nearly every month. There are fewer jobs, more unemployment claims and increased number of unemployed workers.
According to the Mises Institute, a rise in minimum wage usually has a deleterious effect on net job growth. Instead of firing workers, firms will look for cheaper long term solutions that can offset, over time, the extra wage costs.
“In essence, minimum wage increases make it more likely that firms won’t hire new people than that they will fire current employees,” the institute wrote. “For example, movie theaters have stopped employing ushers almost entirely. And many companies are moving toward more automation, at least partly because of minimum wage increases.”
Opponents say that as well-intentioned as advocates are, their effects often hurt those they most intend to help. Those who are on the lowest rungs of the economy are those most likely to be laid off or not hired as jobs erode. The increase creates a surplus of available workers to choose from, meaning those least skilled are going to continue to rely on public assistance to get by and will remain underemployed or unemployed.
Data backs up these very claims. According to 2013 data from the federal Bureau of Labor Statistics, among states with a minimum wage at $7.25, the average unemployment rate was 6.4 percent, compared to a 7.4 percent rate in states with a minimum wage about $7.25. Similarly, the average net growth rate for the lower-wage states was 0.8 percent compared to a 0.5 percent rate among states with a higher rate.
Certain economic sectors are particularly vulnerable to raises in the minimum wage. Take agriculture, which needs to compete globally regarding commodity prices.
New Jersey farmers, for example, say market forces prevent them from raising prices on their crops if they want to maintain a competitive advantage. As a result, the choices are stark. Increased wage costs likely mean stopping farming altogether in many cases. The farmers are seeking an exemption to any minimum wage increase. Without doing so, farmers and other states are likely to swoop in.
Pete Furey, executive director of the New Jersey Farm Bureau, says the competitive risk is significant. A New Jersey peach farmer cannot raise the price on a box of produce to compensate for wage increases. “But a peach grower in South Carolina, Georgia or elsewhere is all too eager to exploit this vulnerability, capitalizing on the spoils of New Jersey’s vast consumer base,” Furey said.
No one disagrees that a better quality of living is a good thing for all American workers. However, careful consideration needs to be given before deciding a huge hike in the minimum wage is the answer.
Regards,
Ethan Warrick
Editor
Wealth Authority
