Minimum wage increases are a subject of great debate, and California, with its scheduled rate hike to $15/hr by 2023, has folks on both sides of the discussion heated. The topic is so hot, UC Berkeley was motivated to analyze what the effects of a high minimum wage in California would be.

 

Both Sides of the Debate

Critics think automation of previously “human held” jobs, as well as reduced sales due to an inevitable increase in prices, will reduce employment opportunities, creating a rise in unemployment. However, those on the other side see the wage increase directly causing an economic boost, less job turnover, and an increase in productivity. So, is either side correct, or does the minimum wage hike offer a blend of both problems and opportunities?

The UC Berkeley study took these arguments and unified them using a market model that takes into account how all involved, from the worker to the consumer, respond to and are affected by the increase. They then came up with, what they believe, will be the actual effect of a high minimum wage in California, and their results may surprise you.

 

How Will It Affect Minimum Wage Workers?

The Berkeley study states that currently 38% of California’s workforce would be directly affected by the pay increase of approximately $3,900 (2015 dollars) per year. Of these workers, 58.2% are over 30, and 47.3% have attended college. The majority of these minimum wage workers don’t have health insurance, and they generally earn close to half of their family’s income.

Over half (55%) of those in California who would receive an increase are Latino, a community who would also benefit the greatest from the “downstream effects,” such as achievements in education by children and better general health of both children and adults alike. Source: http://irle.berkeley.edu/effects-of-a-15-minimum-wage-in-california-and-fresno/

 

How Will It Affect Businesses?

Although it is obvious that businesses will be affected by California’s minimum wage increase, it may not be in the way one might expect. First, the change will impact three industries that make up the largest percentage (approx. 40%) of minimum workers, namely retail, restaurant, and health services.

Restaurants specifically will feel the greatest impact as 79.2% of those employed in this industry will receive the increase, bringing about a total wage cost increase of 15.7% (as opposed to the 2.8% total wage cost increase across the board). Source: http://www.pewresearch.org/fact-tank/2017/01/04/5-facts-about-the-minimum-wage/

However, having happier, more productive employees is shown to increases profits, and not having to constantly train new employees saves money. These two factors could offset much of the added payroll costs, according to the study. Unfortunately, to absorb the rest of the cost, restaurant industries would have to raise prices by 5.1% over 5 years, but consumers from across the entire economic spectrum say they would pay these increased prices, and those in the lower income brackets could afford to pay the higher prices, and would likely do so more often.

For non-restaurant industries, they would only have to increase their prices by less than 1% by 2023, and in doing so would absorb their total wage cost increase, no differently than standard inflation. In fact, 1% is historically less than the 1.8% annual inflation rate for 2017. Source: https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093

 

Conclusion

So, what is the net effect of a higher minimum wage in California? As with any economic forecast, unforeseeable economic change may cause the results to differ. With a very slight increase in prices that would be paid by all consumers, about 5.26 million workers would receive a significant increase in their earnings. Using past population employment trends, there is also likely to be a small increase in employment growth, adding 13,980 jobs by 2023.

After weighing the negatives, (such as jobs lost to automation and higher prices), against the positives, (such as a reduction in employee turnover and putting more money into the economy), at worst it balances itself, and at best creates a positive effect on the economy.

 

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