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Straight Talk About Minimum Wage Laws

California Governor Jerry Brown just signed a bill that will gradually raise the state’s minimum wage from $8/hour to $10/hour by 2016, saying it is a long overdue measure to raise the income of working families. Yet earlier in September Washington DC Mayor Vincent Gray, also a Democrat, vetoed a City Council bill that would require large retailers [read Wal-Mart] in the city to pay higher wages, a measure that had drawn national attention. Gray called the bill a "job-killer," saying it would result in the loss of thousands of jobs in Washington. So who’s right?

California businesses were already adjusting to a sales tax increase, which voters approved last year, and are preparing for the coming impact of the Affordable Care Act (Obamacare). The new law will saddle the Golden State with the highest minimum wage law in the nation. Washington state’s minimum wage by comparison is $9.19 and federal minimum wage is $7.25. President Obama in his state of the union message earlier this year said he wanted to see that raised to $9, but he has not yet done so.

Supporters point to studies that claim that raises in minimum wage do not affect overall employment. The companies most at risk are fast food retailers. According to a Los Angeles Times report “While Starbucks and Chipotle have comparatively large exposures to the California market, they tend to employ relatively few workers at the minimum wage, limiting the direct negative effect.” The LATimes quotes Sara Senatore of Bernstein Research: “The casual diners similarly tend to pay most of their workers more than the minimum wage, an effect of the tipped-wage arrangement.” In contrast, she noted that quick-service companies such as McDonald’s Corp., Yum! Brands Inc. and The Wendy’s Co. — which employ a large amount of workers at the minimum wage — are more vulnerable to a negative impact. However, she noted, “The diversity of their operations, particularly the global players, helps mitigate the overall impact.”

Skeptics like Wall Street Journal editorial page contributor Stephen Moore say, “There’s no minimum wage fairy. The money to pay the extra cost has to come from somewhere and mostly it comes from the pockets of small business owners who either swallow the cost or raise prices. It directly affects the lowest skilled worker. When you raise wages it incentivizes business to automate.” For example, California’s famed In-and-Out Burger restaurants have automated order taking and employ fewer workers. At 35 %, California has the highest teenage unemployment in the nation.

Expense reductions across tens of thousands of companies across California’s struggling economy will ultimately demonstrate the extent to which the $10 minimum wage level may backfire. While it may not be possible to forecast how many people may lose jobs, some certainly will. Companies also may cut other expenses, which in turn would hurt their suppliers. Some people will make more money, but there may be fewer of them making it.

“The real issue for California,” says Steve Malanga, Senior Fellow of the Manhattan Institute, who follows Golden state developments, “ is that the recent law enacted by Gov. Brown is one more indication that the state is not friendly to business. I am reminded of a CEO comment in Chief Executive’s annual survey of Best and Worst States that stated that while New Jersey has had a long history of being anti-business, the CEO felt Gov. Chris Christie ‘was trying’ to change this. This is reflected in other polls of businesses in the Garden State. They are feeling more confident that the state’s leaders are at least moving in the right direction. This is not the case in California. Business leaders as sampled by Chief Executive’s own surveys think it’s one of the least friendly and they have no sense that Sacramento wants to make it better.”

Nonetheless, increasing the minimum wage remains popular. A number of Democrat representatives have proposed raising the minimum wage nationally, but no one’s proposal goes quite as far as that of Nick Hanauer, a venture capitalist who made a name for himself as an extremely wealthy critic of economic inequality. Hanauer proposes raising the minimum wage to $15. Adherents point to a select few academic studies, one in particular in 2005 that studied minimum wage increases in New Jersey that claimed it had no adverse employment effect.

Yet this has been directly contradicted by David Neumark, a University of California, Irvine, professor and specialist in the field who is the author, with William Wascher, of “Minimum Wages” (MIT Press, 2008). “Despite a few exceptions that are tirelessly (and selectively) cited by advocates of a higher minimum wage,” Neumark states, “ the bulk of the evidence — from scores of studies, using data mainly from the U.S. but also from many other countries — clearly shows that minimum wages reduce employment of young, low-skilled people.

“The reduction in jobs for youths might be an acceptable price to pay if a higher minimum wage delivered other important benefits. Many people believe, for instance, that it helps low-income families. Here, too, the evidence is discouraging. There is no research supporting the claim that minimum wages reduce the proportion of families living in poverty. Research I’ve done with William Wascher of the Federal Reserve Board and Mark Schweitzer of the Cleveland Fed indicates that minimum wages increase poverty.”

Read more: California Minimum Wage Soars to $10 – 24/7 Wall St.





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