California's Minimum Wage Hike Puts Business Community at Risk

California's Minimum Wage Hike Puts Business Community at Risk
Image credit: Reuters | Lucy Nicholson
Fast-food workers and their supporters join a nationwide protest for higher wages and union rights in Los Angeles, California.

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Former Editorial Director at Entrepreneur Media
7 min read

California has just given a gift to the 49 other U.S. states.

Gov. Jerry Brown announced today that lawmakers have come to an agreement to raise the minimum wage to $15 an hour, making it the highest rate for a state in the nation. It's more than double the federal minimum wage of $7.25, and 50 percent higher than the current state rate of $10 an hour.

On the surface, it seems like a great way to ensure that workers in the state are somehow guaranteed a "living wage" by greedy employers who put profits over people. At least that's how the union proponents and their political allies have framed the debate. If you're against a higher minimum wage, the argument goes, then you're against working families and you're promoting poverty.

Related: The Minimum Wage Battle Is Here to Stay

It isn't that simple, and a very strong counterargument can be made that the most at-risk groups -- young workers, immigrants, minorities -- stand to lose more with a higher minimum than they would had the state not caved to political pressure.

First, it's important to note that almost no one in this country actually is paid a minimum wage. For skilled work, it's unheard of. You can't compete for talent by offering the bare minimum, and employers who are concerned with employee attraction and retention often wish their were a maximum wage, rather than a minimum. Good, hard workers, with skills, education and experience, don't have to worry about a minimum wage. 

Very few people are even touched by it. Just 2.6 percent of all of the nation's wage and salaried workers made at or below the minimum wage in 2013, the last year when reliable data are available, according to the Bureau of Labor Statistics. So the vast majority of the country already makes above minimum wage.

Related: Chipotle Raises Prices in San Francisco After Minimum Wage Hike

Also, the idea that low minimums somehow disproportionately punish working families is not supported by the data. On the contrary, most workers affected are new to the workforce. According to Pew Research, 50.4 percent of people earning at or below the minimum wage are between the ages of 16 and 24. Twenty-four percent are teenagers.

What's more, we aren't talking about people pursuing careers when we talk about minimum wage. Indeed, the data show almost two-thirds of those making the minimum wage actually work part-time, according to Pew.

So, even if you believe the minimum wage is low, it really isn't a problem for virtually anyone in the country. Leaving it precisely at its current level isn't dragging people into poverty. In true, free-market fashion, the markets have regulated pay to the point where the minimum wage is irrelevant.

But a minimum wage is one of those pesky little regulatory whips that lawmakers feel they can trot out to exercise muscle over the business community. It plays well to the electorate. Look at these brave lawmakers ensuring you get more money. This is an interesting election year, after all, and the rise of Bernie Sanders nationally has come with a populist, anti-business message that appears to be resonating with younger voters. It's never enough to run for something. Most politicians win by running against someone or something, and a platform that targets the business community is a pretty safe move in a state that has a 6.3 percent unemployment rate, well above the 5.3 percent rate for the U.S.

Related: California Unions, Lawmakers Agree to $15 Minimum Wage

But that unemployment rate is likely to rise in California, not fall, thanks to new minimum wage. Take the passion and politics out of the equation, and look at the situation from a practical level. The expansion will likely mean that more workers are suddenly subject to the minimum wage, and, therefore, employers will have a decision to make: pay more to comply with the law or fire the workers. With apologies to those who have made their living demonizing capitalism, but the inarguable truth is that the vast majority of business owners care for their employees and pay their workers the highest they can afford to, based on their skills, experience, and the revenue they help to bring in. They do this because it makes the most economic and business sense. Happy and stable employees give great customer experiences, which keep those customers coming back. 

These business owners don't want to get rid of their workers. But a budget is a budget. If wages rise, your ability to keep employees rests on your revenue. That typically means raising prices. 

And therein lies the great dilemma. You can keep prices where they are and fire workers, thereby hurting people making the minimum, or you can keep people employed and raise your prices, hurting the consumer and squeezing the value of the wages your customers make. Either way, the somebody gets hurt, and the pain is felt at the very bottom of the economic rung, ironically the low-income people you are trying most to help.

Gov. Brown, to his credit, has sought to ease the impact of the hike by phasing it in over a long time, and he has resisted such a major rise because he wanted to be able to suspend the hikes depending on economic conditions. Apparently, he got both concessions, which is a victory, but that might not soften the blow as much as he hopes.

That's why a moral argument can be made for doing nothing at all over doing something that could hurt low-income workers. Since data indicate the minimum wage is neither helping nor hurting workers, since it has so little impact right now anyway, why tinker and potentially hurt the working class?

There is, of course, another option, one that is increasingly more attractive to the business community: moving out of state. California's cities are expensive places in which to operate, given the tax and regulatory environment. Yes, there are advantages -- the education system is top-notch -- and areas like San Francisco/Silicon Valley and Los Angeles/Orange County continue to see growth. But economic expansion in California depends on business investment in the rest of that vast state, and it's a tough sell to attract and retain companies in an evironment that requires the highest wages in the country. There are, after all, 49 other states in the union, and areas like Texas, South Florida, Nevada and Arizona have all enjoyed success in attracting business that otherwise would have chosen California as their home. Their pitches suddenly got a lot easier today. They may want to consider even paying Jerry Brown a sales commission.

Truth is, the rise in the minimum wage is just another sign that the state, once a true land of innovation and opportunity, is increasingly wrongheaded in its public-policy stances toward businesses. Manifest Destiny's endpoint, the last stop on Horace Greeley's admonition to "Go west, young man," purports to welcome all, but only if profit is not your motive and you're not one of those nasty capitalists who wants to keep some of your income for yourself.

Even for entrepreneurial companies and startups, who would never dream of paying workers so low of a figure as a minimum wage, the move by California is a sign that politics will always triumph over common sense when it comes to the philosophical approach to business. It's a reason to go east, young businessman and businesswoman, and go there fast.

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