California’s Dream World

California Gov. Jerry Brown caved in recently to intense lobbying from labor-union leaders and signed a bill to raise the state’s minimum wage from $10 to $15 per hour by 2022.

“California is proving once again that it can get things done and help people get ahead,” Brown said.

Dream on, Gov. Brown – the only people who will get ahead are the members of the Service Employees International Union (SEIU), public-sector employees generally, and progressive activists.

Many other Californians will be hurt, especially young, less-skilled and less-well-educated blacks and Latinos, some of whom either will lose the jobs they have at $10 per hour or be unable to find work at all.

The economic science of minimum-wage laws is settled. While the magnitude of the effect may be disputed, virtually all credible studies of labor markets show that increases in the minimum wage reduce the amount of work private employers are willing to offer, the total compensation workers receive, or both.

The impact of a minimum-wage hike may not show up in total employment, but it can materialize in many subtle forms. Employees’ hours can be cut or jobs reclassified from full time to part time. “Fringe benefits,” such as scheduled work breaks, paid vacation time, on-the-job training, and help paying for uniforms worn at work can be reduced or eliminated to shift compensation from nonwage benefits (often untaxable to the employee) to taxable cash wages.

The cost to the employee of losing nonwage compensation is highest in the case of retirement and health care benefits, since employers can insure their workforces at a lower cost per employee than individuals can buy such coverage on their own.

Ordinary people can see some of these forces at work almost every day as profit-seeking private retailers try to control their labor costs (the single largest cost of doing business in many cases) by replacing human check-out clerks with self-service scanners that record purchases and then “ask” the customer to pay with cash, check, or credit/debit cards. The once-ubiquitous table server is being replaced by electronic kiosks in San Francisco restaurants. That trend is sure to continue and to accelerate over the coming years as California’s minimum wage rises to $10.50 per hour in 2017 and then by $1 every following year until it reaches $15.

Adam Smith wrote that he had never seen much good done by people claiming to promote the public good. California’s pending minimum-wage hike will be testimony to the bad consequences of good intentions. A stroke of Gov. Brown’s pen cannot magically cause workers employed at $10 per hour suddenly to become employable at $15 or even $10.50.

Economics 101 teaches that someone can find a job in the private sector only when that person adds more value to a business than it costs to employ her. Lobbying by the SEIU or any other special-interest group cannot override that principle.

A strategically timed study by UC Berkeley’s Labor Center claims that some 5.6 million Californians employed at wages now below $15 per hour will see their paychecks rise 24 percent ($3,400 per year) by 2022. But that study assumes, contrary to economic theory and evidence, that all 5.6 million people not only will keep their jobs at the higher minimum wage, but that the 80 percent of them employed full time will continue to be offered 40 hours of work per week. That conclusion is equivalent to saying that water runs uphill.

It is sometimes said that rises in unemployment or reductions in hours of work are the “unintended” consequences of minimum-wage laws. Nothing could be further from the truth. The consequences of such harmful policies have been known for as long as they have been around.

Since economists can predict what will happen in California, one might well say that minimum-wage supporters must deliberately intend to make it harder for poor young blacks and Latinos to find jobs, acquire work-related skills and earn their own ways out of poverty.

William F. Shughart II is Research Fellow and Senior Fellow at the Independent Institute, the J. Fish Smith Professor in Public Choice at Utah State University, past President of the Southern Economic Association, and editor of the Independent book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.
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