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8 Ways California's Deal to Raise the Minimum Wage to $15 an Hour Could Backfire

By Sean Williams - Apr 3, 2016 at 9:43AM

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A higher minimum wage only tells part of the story of what could happen to California's economy if this deal becomes a law.

Image source: Flickr user OFL Communications Department.

After being discussed for years, a deal that would eventually boost California's minimum wage to $15 per hour, more than double that of the federal minimum wage of $7.25 an hour, has been reached between California's state legislators and its labor unions.

As The Los Angeles Times reported last weekend, although the deal has yet to be finalized in the states' legislature, lawmakers are attempting to push through the drastic minimum-wage increase without it having to go to ballot. However, this does not mean a ballot initiative or two is out of the question come November.

The proposed deal would look to push the minimum wage from an already nation-high (for an entire state) $10 an hour to $10.50 by 2017 and $11 by 2018. Thereafter, wages would increase by $1 an hour each year until 2022, when they reach $15 an hour. The deal is structured in such a way as to allow smaller businesses with less than 25 employees an extra year to comply. Though we've seen $15-an-hour minimum-wage laws pass in big cities such as Seattle, we've yet to see an entire state (let alone the biggest economy by far in the United States) take that pledge.

Image source: (Los Angeles Mayor) Eric Garcetti via Flickr.

Why the $15-per-hour minimum-wage movement is gaining steam
The push for higher wages is pretty easy to understand. The U.S. Census Bureau in 2014 announced that the U.S. poverty rate was 14.8%, or, in simpler terms, about 46.7 million people were living in poverty. The federal government defined a person to be in poverty in 2014 if that person earned less than $11,670 in annual income. Raising the minimum wage is all about allowing the working-class American the ability to earn a "living wage," or enough income that they can safely cover basic-needs expenses, such as rent, electricity, and food.

Based on California's current $10-an-hour wage, the average full-time worker is bringing home about $20,800 per year. Moving this to $15 an hour should push annual income up over $31,000. This added income is expected to help cover those basic-need expenses, as well as work its way back into the economy vis-a-vis consumer spending.

Additionally, the hike in wages could help boost worker morale, which in turn can be a positive for businesses in general. We've all heard the phrase that "a happy worker is a productive worker," but a study from economists at the University of Warwick in 2015 actually found that happy workers were 12% more productive than workers who weren't happy. In other words, extra pay could have its rewards for California-based businesses.

Eight ways California's minimum wage deal could backfire
Yet for each positive that could come about from a higher minimum wage, there appear to be a mountain of negatives that could be considerably worse. It's very difficult to say what a minimum-wage increase of this magnitude will do, mainly because it's going to take many years to be fully implemented, but here are eight ways that California's $15-an-hour minimum wage could actually backfire in a big way.

1. Hours or jobs could be lost
The most front-and-center concern with raising the minimum wage is that businesses may look to reduce the hours their staff works, or will simply give some of their employees pink slips, if labor costs rise by an additional 50% from where they are now.

Image source: Pixabay.

In an interview with CBS's Sacramento affiliate in December, Dave Leatherby, owner of family-owned ice cream shop Leatherby's, noted at the time that he may have to let up to 30% of his staff go based on the hourly wage increase from $10 to $12.50 an hour by 2020 in Sacramento (this was before the latest deal announcement). You can imagine what might happen now with the entire state on the precipice of a $15-an-hour wage.

2. Job opportunities could be scant
On one hand, a higher working wage would probably improve workers' loyalty to their job, which in some lights businesses can view positively. It may mean that workers take more pride in their job.

However, for those unlucky enough to be laid off, who quit, or who are simply unemployed and looking for a job when a minimum-wage hike is enacted, finding a new job might be extremely difficult. If businesses do indeed cut their workforce to reduce expenditures, there are probably going to be more people competing for fewer jobs. We could be talking about extended periods of unemployment for these individuals, and a greater strain on California's income security programs (i.e., unemployment income and nutritional programs).

3. Worker benefits may be cut
The intangible benefits that workers receive could wind up on the chopping block if minimum-wage hikes are enacted.

Image source: via Flickr.

For example, imagine working in San Francisco, an area notoriously difficult to find parking, and having your employer comp part or all of your parking fees each month. If your hourly wage increases by 50%, maybe your employer no longer feels the need to provide a subsidy for parking or transportation costs. We could also see employers pulling back on 401(k) matching contributions, or even pushing employees down below a 30-hour average work week so health insurance coverage is no longer a requirement. These intangible factors are part of workers' wages, and they may be reduced or disappear entirely with a $15-an-hour minimum wage.

4. Businesses may look elsewhere
No deep explanation needed here: if businesses are faced with the prospect of opening up shop in a state with a $15 minimum wage, they may just consider looking elsewhere to do business.

In 2012, California collected almost $8 billion in corporate net income taxes. Comparatively, it brought in $112.4 billion in total tax revenue that year. While I wouldn't count on a plunge in corporate tax income, it's possible we could see this $8 billion figure stagnate or drop as businesses, large and small, open up shop in other states to avoid California's high minimum hourly wage.

5. Tenured worker pay has to go up as well
An often overlooked component of the minimum-wage increases is that other employees who aren't making minimum wage will almost assuredly have their wages rise by a corresponding amount, too.

Image source: Flickr user Thomas.

Think about this for a moment: If person A is a new hire to your company and person B has been there for seven years and is making $12.50 an hour, when the full minimum-wage law takes effect Person A and Person B will be making the same amount of money per hour. Does that seem reasonable? Not if your business wants to retain the talent and loyalty that the tenured employee brings to the table. This means tenured employees and managers are probably going to see commensurate increases in their pay as well, further boosting the real cost of a minimum-wage hike.

6. The process of rewarding skill for pay would be disrupted
Another potential overlooked problem is that it turns the process of rewarding skill for pay on its head. In theory, people who have more skills, either through years of experience or years of schooling, should be paid more than those without desired skill sets. Even now this doesn't always hold true, but it tends to hold true more often than not. Data from Pew Research Center in February 2014 showed that millennials ages 25 to 32 with a four-year college degree or higher earn about $17,500 more per year (in 2012 dollars) than same-age workers who just have a high school diploma. This is skill-for-pay in action.

However, automatically rewarding workers with a $15-an-hour wage right out of the gate could diminish minimum wage workers' drive to learn valuable and in-demand skill sets. In a way, it also means businesses could be spending more on lower-skill workers when, in theory, retaining top-skilled talent is where businesses could see the biggest boost in long-term profitability.

Image source: Pixabay.

7. The price for goods and services might soar
An option for businesses might be to simply pass along higher wage costs to the consumer if wages rises to $15 an hour. Fox News in July reported on a few of the unintended consequences of Seattle's $15 minimum-wage law, which include having some restaurants increase their prices by as much as 15%, and having some managers at restaurants discourage tipping since their servers are now earning more. What this is doing is reducing income for servers who are reliant on tips and allowing back-of-house workers such as dishwashers to earn a higher wage than servers.

But it's more than just paying more when going out to eat. The price for rent, public transportation, parking, and so on could all shoot dramatically higher in step with the minimum-wage increases. It's possible that high levels of inflation could completely counteract the minimum-wage increase in a matter of years.

8. Innovation could suffer
Finally, as was touched on above, a $15 minimum wage could discourage socioeconomic advancement. If a minimum-wage worker lands a full-time job that can pay around $31,000 a year full-time, his or her drive to learn new skills and advance even further may be tempered. This may wind up counteracting the loyalty and productivity boost workers are expected to bring to the table from receiving a considerably higher minimum wage.

It's still far too early to tell if a $15 minimum wage is bad news for California's economy, but the data would appear to suggest that there are considerably more paths to disappointment than success. This deal could wind up backfiring badly on California-based businesses and the states' minimum-wage workers

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