What happens when you raise the minimum wage?

California’s new minimum wage law may improve food security for the poor, but it also threatens to cut hours or kill jobs for millions of workers.

Under the law, by 2018, the new minimum wage in California will rise from $10 to $11. By 2022 it will be $15, the highest in the country at the state level. Though there have already been city-specific minimum wage increases beyond the federal and state level, a large state-wide increase like this has the potential to seriously distort the labor market.

The minimum wage has a long history in the United States; first introduced in 1938, the levels have often stagnated (in nominal, non-inflation-adjusted terms) for long periods of time in between bouts of having the level increased. However, there is still considerable disagreement on the relative impacts of the minimum wage — impacts that will be magnified with this unprecedented 50 percent increase in California. 

How will employers respond to the new law?

Though the minimum wage provides additional wage incomes to workers, these are offset by firms in a number of ways. There is evidence that layoffs (or reductions in hours offered by firms) are limited, as well as being largely concentrated among teens and the poorest and least educated workers. In part, this is due to the notion of efficiency wages, where workers may become more productive as wages increase, due to the increased opportunity costs of being fired. It can also be looked at in terms of companies’ “firm loyalty” to workers, where firms worry about the impact of layoffs on employee morale for those who are not laid off.

But there are other ways in which firms can “pass off” their increased costs back to workers. If firms raise prices, then (in real terms) the purchasing power of their employees’ new, higher, incomes will have fallen. Similarly, firms can offset higher wages by reducing nonwage compensation (such as contributions to employee health insurance, free or reduced-price meals, and free uniforms) or by reducing training.

Many people wrongly assume that income is the wages that you are paid. In fact, as the state of California points out repeatedly, the income of a household should include the value of nonwage benefits. Decreased real purchasing power and reductions in what many households consider essentials (health insurance) have an impact on the economic viability of a household unit. While a shift toward a higher wage income may seem desirable, oftentimes these income increases are met by increased household expenditures on what may have previously been workplace benefits.

Most devastating is the potential for technological adoption by businesses as a replacement for workers. As the costs of labor increase, costly, long-term investments in new technology become more appealing to business owners. A prime example of this is the rise of self-serve kiosks at fast-food restaurants.

Who gets paid the minimum wage, anyway?

A main point that detractors of minimum wages point to is the fact that it cannot be targeted solely to individuals in poverty. Only 58-percent of minimum wage earners have a family income below the poverty line ($36,000 for a California family). This fails the targeting principle in Economics; to attack a policy issue, one should address it directly rather than indirectly. In fact, many minimum wage workers are teen workers, or a secondary income earner for the spouse. Statistics show that only half of minimum-wage earners work full time, and 80-percent of minimum wage earners work more than 20 hours per week. Not only does this show the problems in targeting individuals who truly need a minimum wage, it shows how firms may respond (by cutting hours) to those who earn the minimum wage.

However, even though it cannot be perfectly targeted to individuals in poverty, studies have found that the minimum wage does have a positive impact on food security for low-income households. Certain studies have found that a 10 percent increase in the minimum wage has reduced Food Stamp expenditures by 1.9 percent, while also decreasing enrollment by about 3 percent. This is important: food insecurity can lead to higher lifetime healthcare costs, so individuals moving off of Food Stamp programs is an encouraging sign.

Who will be affected by the minimum wage increase in California?

Using the most recent Occupational Employment Statistics and Wages (OES) in California, we can see the potential disruptive impact that a $15 minimum wage will have on the California labor force.

Table 1: California Occupation and Wage Totals

Occupation Total # of Jobs 25th Percentile Wage 50th Percentile (Median) Wage
All Workers 14,496,600 $12.19 $19.49
Emergency Medical Technicians (EMT’s) and Paramedics 16,720 $12.06 $16.21
Healthcare Support Occupations 352,700 $12.60 $15.87
Food Preparation and Serving-Related 1,456,340 $9.52 $10.70
Building and Grounds Cleaning and Maintenance 480,780 $10.37 $12.95
Cashiers 392,240 $9.36 $10.16
Retail Salespersons 452,990 $9.58 $11.31
Secretaries and Administrative Assistants (Except Legal and Medical) 212,200 $14.94 $18.86
Farmworkers and Laborers 178,130 $9.38 $9.62

 

From table 1, we see that at least a quarter of all workers (slightly under 4 million) workers will be impacted. Breaking down workers into different categories, we see that the workers impacted will be, predominantly, those who are least able to afford a reduction in their hours worked. Nearly all 178,130 farmworkers will be impacted, as well as nearly all 850,00 cashiers and salespeople. Most importantly, restaurants, where profit margins are low to begin with, will see nearly all of their 1,456,340 workers impacted by the minimum wage increase.

What is the minimum wage good for?

While poverty reduction is an important goal, it appears that a minimum wage may be an ineffective (and perhaps impotent) tool in the fight as compared to measures that lead to investment in the workers themselves (education, for example). It also appears that those whom the minimum wage is aimed to support will be those most impacted, for better or worse.