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Sacramento Spotlight: AB 10 – Minimum Wage Increase

Tuesday, March 12, 2013

This marks the first in a regular series examining legislation introduced by California lawmakers.

 

At first glance, minimum wage laws are popular concepts.  A recent Reason-Rupe poll found that 66% of Americans favor President Obama’s proposed 24% increase in the federal minimum wage to $9.00 per hour.  This matches the sentiment found in a recent NBC/Wall Street Journal poll (58% in favor) and a Pew Research Center/USA Today poll (70% in favor).  However, if educated about the effects of such policies, the public’s opinions shift; based on the Reason-Rupe poll (which asked a follow-up question stating one negative unintended consequence of minimum wage laws: employer layoffs), approval of a wage increase dropped to 37%.

In the “Spotlight” is AB 10, authored by Democratic Assemblyman Luis Alejo, which aims to increase California’s $8.00 per hour minimum wage.  The bill has four stages:

1) Increase the minimum wage 3% on January 1, 2014 to $8.25;

2) Increase it by 6% on January 1, 2015 to $8.75;

3) Increase it again by 6% to $9.25 on January 1, 2016, and;

4) Starting on January 1, 2017 (and every January 1st thereafter), increase the minimum wage by the previous year’s California Consumer Price Index.

AB 10 would allow the California Industrial Welfare Commission to adjust the annual increase more than the California CPI, but would preclude it from decreasing (or increasing) the minimum wage in deflationary years.

Minimum wage laws all have the same intended goal: to reduce poverty. Proponents theorize that minimum wage increases will also boost employee morale thereby increasing business efficiency.  However, despite their initial popularity, such policies continue to fall short.

It isn’t surprising why on the surface such laws are popular. Last fall’s Measure D campaign in San Jose, which raised that city’s minimum wage 25% to $10.00 per hour, used emotional anecdotes to spur support and cast opponents as heartless individuals.  However, while pathos arguments are useful for campaigning, they provide little use in policy analysis.  Instead a logos argument examines the merits of a policy alternative and determines whether it is the best option available.

In order for minimum wage laws to reduce poverty, they must affect those in poverty.  As workers’ data complied by the federal Bureau of Labor Statistics show, the predominant individuals represented in minimum wage jobs are teenagers and more broadly, those under the age of 25.  While workers under the age of 25 only make up one-fifth of the hourly-rate national workforce, they account for over half of the minimum wage workers.  Teenagers make up over 21% of the minimum wage workers while hourly rate workers over the age of 25 make up just 3% of minimum wage workers.

There is, also, no major variation in minimum wage workers between the races.  Only 5% of hourly rate African-American, Hispanic, or white workers are employed at or below the minimum wage (3% for Asian).   Minimum wage workers are, on average, teenagers (typically working their first job) and on average, are not below the poverty line.  As such, minimum wage workers are usually in a temporary economic position.

California, additionally, actually ranks among the bottom of the 50 states in terms of the share of its hourly rate workforce employed at or below the minimum wage (just 1.4% of its 8.8 million hourly rate workers).  Despite this, California has the 7th highest statutory minimum wage (tied with Massachusetts), outpacing border-state Arizona and competitors like Texas, Florida, and North Carolina.  California’s $8.00 per hour rate also outpaces other progressive states like New York, New Jersey, and Minnesota.

AB 10 falls short in at least two regards:

(1) It would affect less than 2% of the state’s hourly rate working population;

2) As that population, on average, isn’t poor, AB 10 wouldn’t live up to its sales pitch of reducing poverty.

However, minimum wage laws do affect the labor market.  Basic economic theory illustrates that demand curves are downward sloping and supply curves are upward.  This economic relationship means that price floors (which minimum wage laws are) increase labor supply while decreasing demand for labor creating a surplus of labor.

While the basic theory is straightforward, there is debate surrounding the employment effects of minimum wage laws.  Princeton economists David Card and Alan Kreuger suggest that there is no “disemployment” effect, while others such as co-authors David Neumark and William Wascher have shown such effects.  In a more recent study (Jonathan Meer and Jeremy West), “disemployment” effects are shown to occur, but through reduced new hiring as opposed to layoffs.  However, because minimum wage workers are disproportionally younger workers, a majority of minimum wage studies show the “disemployment” effects are focused among the younger generation. Such studies have shown that a 10% increase in minimum wage rates reduces teenage employment by between 1% and 3%. This probably wouldn’t affect the overall state economy, since it’s such a small component of the greater workforce, but it still is a negative unintended consequence of minimum wage laws.

Minimum wage laws supposedly boost employee morale and as such, business effectiveness. However, AB 10’s increases would mean California would have among the highest minimum wage rates in the country.  According to CEO Magazine, California currently holds the title of “worst state for business in America” – a dubious honor the Golden State has held for eight consecutive years.  In addition, a recent California Chamber of Commerce climate survey shows that a whopping 73% of Golden State-multistate business owners consider California a more difficult business terrain than other states.  These business owners view the high cost of doing business in California – regulations, state and local taxes, healthcare costs, labor and housing costs – as the main drivers for California’s poor business climate.  AB 10 would increase one of these costs by 16% in just three years and then increase it again, annually, by an unknown amount. Not only would AB 10 drive up labor costs, it would also instill uncertainty into one of business’s major cost drivers.

Lastly, AB 10 would institute automatic rate increases.  Currently, 10 other states have automatic increases of some sort (typically pegging the rate to an inflation or cost of living formula) – four of which have higher current minimum wage rates than California.  However, the automatic adjustments eliminate one of business’s key cyclical adjustment mechanisms. Inflation allows businesses, particularly in economic hard times, to reduce its labor costs without actually having to cut pay or its workforce.  Yet, when law mandates pegging the minimum wage to inflation, businesses have one fewer adjustment mechanism available, and thus, they have to absorb losses through profit reductions or reduced hiring and/or layoffs.

However, minimum wage laws are not the only policy alternative available for poverty reduction and standard of living enhancement. For a long-term solution, advancing quality educational opportunity and achievement would work to reduce poverty as well as introduce many other positive externalities into California’s economy.

However, education reforms take years to filter into the greater society. For more immediate effects, the creation of a state earned income tax credit (EITC) would help those in poverty and not introduce market distortions.  An EITC is a refundable tax credit for tax filers below a certain income level. In effect, it is a negative income tax allowing those in need of assistance to receive additional income. Oregon and Washington join 21 other states that have their own EITC (in addition to the federal EITC). However, California’s other bordering states, Nevada and Arizona, don’t have such a tax credit. Neither do two of California’s top economic competitors, Texas and Florida.

Despite its apparent disadvantages, AB 10 likely will work its way through both liberal-dominated chambers of the state Legislature.  The question is: does Gov. Jerry Brown sign it into law or seek amendments? On one hand, Brown will feel pressure from Sacramento progressives to ensure that California isn’t eclipsed on this issue as other liberal states (New York, Minnesota, Maryland, and Hawaii) consider rate increases. On the other hand, Brown is up for re-election in 2014 and will have to defend that 50th-best business climate in the country.

A wise move for Brown would be to substitute a California EITC in place of AB 10. He prides himself as a pragmatist. And, stripped of its emotional baggage, minimum wage increases don’t add up to practical policy choices.

Follow Carson Bruno on Twitter: @CarsonJFBruno