california

What Happens in California Stays in California; Why $15 Will Boost Employment Statewide

A promotional image from Sony Picture's 2012, which imagined the total devastation California might suffer from a $15 minimum wage.

A promotional image from Sony Picture’s 2012, which imagined the total devastation California might suffer from a $15 minimum wage.

Experienced bloggers know that if you provide a block quote, few readers will click through the cited link — a rule of thumb that less scrupulous bloggers sometimes exploit to devious effect.

For example, take this recent post from Forbes economic blogger Tim Worstall: “California’s $15 Minimum Wage Deal Will Cause Unemployment–And We Have Proof Of This.” Worstall’s claim (as always!) is that a $15 minimum wage will cost many low-wage workers their jobs. Only this time, he kvells, he’s got a lefty economist to back him up:

And we actually do have proof of this: a report about what a $15 minimum wage will do to employment in Los Angeles City. This is not, by the way, a report by some from market fundamentalist like myself. This is from Michael Reich et al at Berkeley, stout supporters of a rise to $15. And yet even their report states that the net effect will be fewer jobs.

Go ahead. Click through the link above and read this Worstall quote in its full context. The “proof” mentioned in Worstall’s headline, that $15 “will cause unemployment,” is a cited study by Berkeley economist Michael Reich. That is the main thesis of Worstall’s post. There is absolutely nothing misleading or unscrupulous about my block quote.

Alas, the same can’t be said for Worstall’s out-of-context quoting of Professor Reich:

Los Angeles City: Combining costs and benefits and taking into account multiplier effects,we estimate a cumulative net reduction in GDP of $135 million by 2017 and $315 million by 2019, or 0.1 percent compared to a scenario with no city minimum wage increase.

These effects on the level of economic activity correspond to a cumulative net reduction in employment in Los Angeles City of 1,552 jobs by 2017 and 3,472 jobs by 2019, or 0.1 and 0.2 percent of all employment, respectively.

Yes, according to Reich’s model, it is true that a $15 minimum wage hike — in the City of Los Angeles — would result in less growth and fewer jobs — in the City of Los Angeles — than there might have otherwise been had the city not raised its minimum wage. But if you click through the provided link and read the Reich quote within its full context (as Worstall presumed you wouldn’t), you’d come to a very different conclusion about the State of California as a whole:

  • The costs of the proposed minimum wage law will be concentrated in Los Angeles City, but the full benefits will be realized throughout Los Angeles County, because more than half of the affected workers live, and therefore spend most of their increased earnings, outside the city.
    1. Los Angeles City: Combining costs and benefits and taking into account multiplier effects, we estimate a cumulative net reduction in GDP of $135 million by 2017 and $315 million by 2019, or 0.1 percent compared to a scenario with no city minimum wage increase.
      These effects on the level of economic activity correspond to a cumulative net reduction in employment in Los Angeles City of 1,552 jobs by 2017 and 3,472 jobs by 2019, or 0.1 and 0.2 percent of all employment, respectively. These employment changes are quite small when compared to projected job growth of 2.5 percent a year in the city.
    2. Los Angeles County: Combining costs and benefits and taking into account multiplier effects, we estimate a cumulative net increase in employment of 3,666 jobs by 2017 and 5,262 jobs by 2019 at the county level.

That’s actually a net increase of jobs throughout Los Angeles County that more than offsets the tiny projected loss within the city proper!

What Reich is describing above is a kind of economic “leakage,” in which the costs of higher wages are borne entirely within the city while the benefits are shared countywide. This is especially pronounced due to Los Angeles’ relatively high concentration of low-wage jobs. The smaller and more local the minimum wage jurisdiction, the greater the potential leakage effect might be.

But California as a whole is a virtual economic island with none of its job centers a reasonable commute from state borders; almost every minimum-wager who works in California lives in California. There would be little if any economic leakage from a statewide $15 minimum wage. Indeed, as Reich explains: “Just as minimum wage increases in Los Angeles will benefit surrounding areas, higher minimum wage levels in those areas would also boost economic activity within the city, allowing Los Angeles to realize its full share of the benefits of a minimum wage increase.”

What Worstall has done is cleverly deceptive: he selectively quotes a study on Los Angeles as “proof” that $15 “will cause unemployment” statewide. But Reich’s model actually suggests the opposite: a statewide $15 minimum wage would provide an economic boost to Los Angeles proper and to California as a whole.

California’s Minimum Wage Increase Is Totally Reasonable

Just a few days after California’ minimum wage initiative officially qualified for to go before voters, lawmakers in the Golden States announced that they’d skip the fight at the ballot box fight and instead, start working on a plan to increase the minimum wage to $15 over the next six years. Naturally, immediately, opponents began telling their tall tails about how the decision would definitely lead to a loss of jobs, because of course, that’s exactly what’s happened before!

Which is not true; if raising the minimum wage necessarily resulted in job loss, Washington State’s border towns, like Spokane, would be lined with empty storefronts—but of course, that hasn’t happened. And, statistically, it won’t.

But I was curious about California’s increase, specifically, because unlike its neighbor to the north, California will only be phasing in their increase, but won’t be staggering them by the size of the city or county, or by cost of living. The entire state will be seeing an increase of a dollar each year between 2019 and 2022. Which sounds like a lot, but is it, really?

From the Los Angeles Times:

The NFIB called the California deal “reckless” and observed, that “small businesses in California are still struggling to cope with the 25% minimum wage hike over just the past two years.” This is a huge exaggeration: California’s minimum wage increased to $10 this year after being raised to $9 on July 1, 2014, and to $8 on Jan. 1, 2008; the proper math would place the increase at 25% over eight years, or 11.1% over the last year and a half.

An increase of 25% over eight years might even still sound steep to a small business owner watching their bottom line, and heaven knows opponents of the minimum wage love to call any and all increase “an experiment,” but just how much is a typical minimum wage increase—and, historically, how does California’s plan factor in?

Often, when we talk about the minimum wage, we talk about the dollar amount of the increase—50 cents here, $1 there—without calculating what percent increase that represents. But it’s important to not just consider at how much it’s gone up in cents, but what percent that is of the existing minimum wage.

california minimum wage

Hello, yes, I do things quite professionally.

For example, historically, the minimum wage has gone up by 20 cents more than once. But when wages were lower (say, when the wage went up from $1.40 to $1.60 between 1967 and 1968), the change was about 14%. It also went up 20 cents between 1975 and 1976, but by that time, that same 20 cents represented just a 9.5% increase.

Since 1938, the minimum wage has been increased just 22 times, though within cities and states, it’s moved quite a bit more. The last federal minimum wage increase was between 2008 and 2009, when the wage was raised  from $6.55 to $7.25, or an increase of about 10.68%. That puts California’s increase of about 11% over the course of a year right in line with the existing data.

Looking back even farther, we can see a few key pieces of data:

  • The highest increase ever was in 1950 when the minimum wage was raised from 40 cents to 75 cents, or about 87.5%
  • The lowest increase ever was in 1975 when the minimum wage was raised from $2.00 to $2.10, or about 5%
  • The average minimum wage increase is 17.48%

As you can see, California’s last few minimum wage increases, then, aren’t that divergent from previous instances of wages going up. And, looking forward, we can see that the proposed plan isn’t that wild, either. In fact, it’s pretty conservative. Here’s the plan as proposed by Governor Jerry Brown:

  • 2017: $10.00 to $10.50 = 5% increase
  • 2018: $10.50 to $11.00 = 4.6% increase
  • 2019: $11.00 to $12.00 = 9.09% increase
  • 2020: $12.00 to $13.00 = 8.33%
  • 2021: $13.00 to $14.00 = 7.69%
  • 2022: $14.00 to $15.00 = 7.14%

Going up a full dollar a year—and four whole dollars over four years—seems like a lot, because $4 over four years sounds high. But as a percentage of the total wage a worker is making, that $1 each year is actually relatively in line with other cost increases, like rents (which go up between 2.5% and 5% each year, depending on where you live), food (which increases year over year by more than a percent), and health care costs (an annual increase of 3% was so low that it was notable).

The idea of a dollar increase sounds like a lot—a whole dollar!—until you compare it to the historical minimum wage increases, and the fact that a dollar is buying less and less. At present, minimum wage workers haven’t seen a raise, nationally, since 2009.

In that time, the cost of living has increased substantially; if the federal minimum wage had caught up with that alone, it’d be over $8.00—but that’s only an increase of just about 10%. Within the existing framework of minimum wage increases, a federal increase to $10.10 over three to four years would be completely in line. In fact, even an increase to $12 over six years would be perfectly reasonable, given the data available for what’s historically been done.

Raising the minimum wage a modest amount over time has yet to prove catastrophic for the total economy, nor has it been directly linked to unemployment among teens, people of color, or any of the other groups that opponents like to point to as potentially hurt. What it has done, though, and what it will continue to do, is to increase the earning power of regular folks in a substantial and tangible way.