Michael Reich

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.