The Dire Consequences of California’s $15 Minimum Wage

By Preston Cooper | April 1, 2016 | 3:18pm EDT
In this Tuesday, July 21, 2015 file photo, workers hold a rally in Los Angeles in support of the Los Angeles County Board of Supervisors' proposed minimum wage ordinance. On Saturday, March 26, California legislators and labor unions reached an agreement that will take the state's minimum wage from $10 to $15 an hour. (AP Photo/Nick Ut)

California Governor Jerry Brown just announced an agreement between lawmakers and unions to raise his state’s minimum wage to $15 per hour. When passed by the legislature and signed into law, as is expected, it will be the first such statewide minimum in the country and a victory for the “Fight for $15” movement. While workers who keep their jobs will be happy to receive a $15 hourly wage, such regulations come at a cost—more expensive labor means fewer jobs, particularly for the young and low-skilled.

According to the agreement, California’s current minimum wage of $10 per hour will rise to $10.50 next year. It will rise to $11 in 2018, and then by one dollar every year thereafter until it reaches $15 in 2022.

Many advocates of raising the minimum wage, such as Professor Arindrajit Dube of the University of Massachusetts-Amherst, still believe that the level can be set too high. Dube proposes a rule of thumb that the minimum wage not be set above 50 percent of the median wage in any locality. I believe the 50 percent threshold is too high, but it serves as a useful benchmark to determine which minimum wages go too far, even for minimum wage proponents.

California’s current minimum wage of $10 is now at 52 percent of the state’s median wage, roughly in line with the 50 percent rule (but probably still too high).  However, wages vary widely across the state. Fresno, a mid-sized interior city, has a median wage of $15.02. Wealthy San Jose, by comparison, has a median wage of $27.61, nearly twice Fresno’s level.

Such differences are not difficult to explain. California includes both Silicon Valley and large agricultural zones in the interior, two regions where wages are hardly comparable. Moreover, as anyone whose jaw has dropped at sky-high San Francisco property prices can attest, cost of living is not constant across the state, meaning wages must be higher or lower to remain concomitant with prices.

Therefore, a universal minimum wage affects various cities in different ways. A $15 wage floor will take a large “bite” out of the earnings distributions of low-wage interior cities, making many low-skilled workers unemployable, while the effects on high-wage coastal cities might be more limited.

To demonstrate this, I projected what each California city’s median wage will be in 2022, when the $15 minimum wage is fully phased in. For this calculation, I assumed 1.5 percent average annual median wage growth, which is generous given that median wage growth has averaged just 1 percent over the past three years. Then, I divided the new $15 minimum by each projected median wage to yield the expected “minimum-median” ratio for each city.

In wealthy cities such as San Jose and San Francisco, the ratio of the minimum wage to the median is about 50 percent—in line with the rule of thumb. However, poorer inland cities such as Bakersfield and Fresno will see minimum-median ratios of up to 89 percent—far higher than any ratio we have yet seen in the rest of the country. Even Puerto Rico, where economists generally accept that a too-high minimum wage has significantly damaged the economy, has a minimum-median ratio of “just” 77 percent.

If California must raise its minimum wage, it should raise it to lower levels for inland jurisdictions with lower-wage labor markets, following an example set by Oregon earlier this year. The state could also create an exemption for younger workers who are most likely to lose out on job opportunities due to higher minimum wages. Though such an exemption exists in many other states, California has none.

For low-skilled workers in poor areas, particularly young people trying to find their first job, the consequences of California’s forthcoming law could be dire. California lawmakers have a chance to step back from the precipice—and should reconsider this policy before too many people are left looking for work.

Preston Cooper is a Policy Analyst at the Manhattan Institute. You can follow him on Twitter here.

Editor’s Note: This piece was originally published by Economics21 at the Manhattan Institute.

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