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Minimum Wage Follies, Part 2 – what can we expect?

Uploaded: Apr 5, 2016

As the LA Times reports, the minimum wage law signed Monday by Governor Brown will: raise the state's hourly minimum wage from the current $10 to $10.50 on Jan. 1, 2017, then to $11 the following year, and increase by $1 annually until it hits $15 in 2022.

Businesses with fewer than 26 employees will get an additional year to comply, and Brown and his successors could delay the increases by one year in the case of an economic downturn. Thereafter, the minimum wage will increase each year based on an inflation index.

So, other than the sky not falling (except, perhaps, on a few unfortunate souls in the PW Town Square), what can reasonably be expected from this measure, as it takes effect over the next several years?

Who’ll be helped? Less than 4% of the CA workforce of about 19 million (about one-million of whom are unemployed) earns the current state minimum wage of $10 generally (it’s higher in several cities). They’re in. In addition, the rise to $15 (about $13.60 in today’s dollars if inflation moves like the last six years) will bring many more workers directly under its terms. In a national study, Pew Research estimates that about 30% of hourly workers are paid within $3 of the minimum (so that’s maybe 15-20% of the overall labor force, depending on location). For this blog’s modest purposes, let’s assume that California roughly resembles the national economy. Many of those folks will also get the mandated raise, or one that keeps them a bit above the then-current minimum as it rises.

Add to that group the workers in jobs like Under Assistant West Coast Promo Man* (actually, ‘retail assistants’) for whom shaky arguments are currently made that they are “exempt” managers to whom these hourly-worker rules don’t apply. In CA, to pay them salaries (and thus also avoid Overtime pay), those pay rates must be set at two-times the min wage. These folks will thus either get significant raises, or they’ll be converted to the hourly roll and probably get some OT. (Note: correction from 1.5 to 2X min wage, 04162015 -- prior miss-recollection TFC).

There is a traditional bugaboo that claims that many min wage jobs will be lost. While that’s theoretically possible, reality is more complex than Econ 101. UCBerkeley’s study of the LA increase to $15 suggested the effect is essentially trivial: a 0.2% loss of jobs to the suburbs, in a labor force that’s growing by about 2.5%/year. And note that those jobs weren't really lost -- they would move to the ‘burbs because it’s easy to cross that boundary, whereas fortress California’s borderlands are mostly inhospitable. In a statewide context, the LA ‘burbs become Las Vegas, Lake Havasu and Yuma. Would you travel there for your next infection with e-chipotli?

Who’ll be hurt? Consumers, a little. This is a very uneven effect, as min wage jobs are concentrated in the hospitality and retail sectors, plus some educators and a few laborers in construction. The overall contribution of labor to product cost is about 23%, and in businesses like fast food and other retail it averages more. A significant increase in a fraction of those labor costs does amount to something – an estimate from Purdue University pegs that number as about 4% of your 2022 Whopper, with cheese.

Taxpayers, maybe. Here’s where things start to get sketchy. The State believes that its personnel costs** in 2022 will increase about $3B, in a likely budget of $130B+. However, there are revenue effects as well, from both income and sales taxes. The Legislative Analyst essentially punted the estimate, but it seems likely that the income tax effect may be slightly negative, more than offset by sales taxes paid by low earners with somewhat deeper pockets, spending nearly all their raises on goods and services that cost a little more. There may also be a SNAP (food stamps) impact, as some workers exit eligibility for the subsidy.

Businesses. Here, it’s crucial to recognize both the cost effect, which is easy, and the price increase possibilities, which are more difficult and individual to each business. Most businesses do not pay any employees the minimum wage, now or in 2022. But, in sectors like retail and construction that do often pay the minimum, labor costs will rise significantly.

That said, whether profitability takes a hit will depend on whether the businesses can raise their prices to offset higher costs. Recall that Everybody’s costs have gone up, so this isn’t Big Macs vs. Quesalupas – it’s fast food vs. bringing a sandwich from home (the dismal econ mavens call it ‘cross-elasticity of demand’ which is really just fancy talk for substitutability). It seems likely that there will be a mild uptick in lunch box sales, although they’re probably made elsewhere.

Finally, some competitive businesses in every market are run better/more profitably than others. This change in everyone’s environment will favor adaptation and efficiency, and some dinosaurs will die-off. The min wage hike may be the asteroid that puts them under, their places to be taken by others.

The Valley vs. the Coast. Economic conditions vary dramatically in our fair corner. The average wage for all workers (including salaried) in SF/Oakland is over $32/hour, whereas in Visalia it’s $18.72. All these noted effects will be magnified in the hustings, and that concern led the sole Dem legislator to vote against the measure. How the balance of helped vs. hurt will come out is everyone’s guess – it’s clear, though, that the impact will be greatest in the lowest wage regions.

Non-profits: this sector ranges from the gargantuan and ridiculously profitable hospital sector to tiny home-care or animal sheltering enterprises. Kaiser will be immune, but the shoestringers who do it for the passion will be slammed. Many pay the minimum and depend heavily on donated support – they’re going to need more of it, as well as more volunteers.

Finally, does any of this mean that we’ve ‘solved’ income inequity in California? Not at all, as there are both absolute and relative perspectives. On the absolute scale, this new law significantly aids and elevates those at the bottom, whose economic plight is worst. But if you examine the income deciles (each 10%, from 1-10 to 90-100), it’s actually the folks smack in the middle range whose ‘real’ incomes have yet to even return to pre-2008 levels. The implications of that stat are many, and to be clear, nobody is proposing any kind of similar solution, at all. It is, however, an important phenomenon – especially if you’re in one of those deciles.

Indeed, it’s a good thing for somebody else that I’m essentially an Uber-driver contractor on this blog – I hesitate to tote the hours, but am pretty sure that even the federal minimum wouldn’t legally compensate this edition. Whew. Next week, we’ll return to lighter fare – maybe, campaign finance?

* Ten-point toss-up – in the US, that song was the B-side of what Rolling Stones hit? No googling! Further bonus (my, my): what was the B-side of the same hit 45 in the UK?

** Actually, there are not many government workers who toil for the minimum, but the state does underwrite services like some home health care, whose workers do make the minimum.
What is it worth to you?


Posted by Cholo, a resident of Livermore,
on Apr 5, 2016 at 3:59 pm

Correction: Chipotle and NOT "chipotli".

The 2022 BURGER will have cheese but no meat patty. At some fast food drive-bye bye sites, one will be able to order fun sandwiches with beef seasoned green raisins! By 2022, most beef will be considered too toxic for human consumption! Porchops 'n raisins with salsa picante works for this one! yup...!

Minimum wage "illegals" will be protected by the Center for Constitutional Rights (CCR) so you had better be way careful if you try to pass off slugs and fake bills for money. YOU WILL DEFINITELY GET BUSTED!

Advocates like myself will be monitoring hot situations very very closely.

call me sherlock...

Posted by Tom Cushing, a resident of Alamo,
on Apr 5, 2016 at 5:24 pm

To the person who flagged the above comment -- I feel your pain. It's another 'shall I remove it' or 'have what he's having' dilemma.

Posted by Michael Austin, a resident of Pleasanton Meadows,
on Apr 5, 2016 at 6:30 pm

Michael Austin is a registered user.

As I tuned in here after having finishing dinner of brown rice, potatoes, carrots and green beans. I realized how irrelevant fast food is.

Posted by Tom Cushing, a resident of Alamo,
on Apr 6, 2016 at 7:11 am

Yeah Michael -- one good way to reduce the consumer impact is to avoid fast food.

Posted by Dirka_Dirka, a resident of San Ramon,
on Apr 6, 2016 at 9:04 am

He came in from the drought ridden fields, while the grass was still green, to Tommy's salad days of American socialism.
The column brought a tear to his eye, much like the reminder that surfaced from last night's extra spicy curry, after taking his morning Cafe Americano. Nice!

Tommy's newfound censor stick will wield its sweeping hand to the Dirka's skewering of this nonsense soon enough.

The Dirkarino still believes in milking the goat by the hand. Moonbeam and company just insured that there is a wonderful business case for robots! Stock tip of the year, buy stock in well capitalized and managed robot companies. Dirka Dirka will never let the robot “hand” sour the milk. Our goat milk will be more expensive now. It's a specialty item for most anyway, so the wealthy can afford it. Some babies are allergic to the cow milk protein. Those babies will have to pay much more, or get their goat milk from out of state operations. Soymilk is just not as healthy for babies.

Cholo, pure genius, he's meant for you Tommy. His raisin patties made, cooked and served by robots. Your five-dollar foot long is now eight bucks.

What happens when socialism takes root, inflation.

No one needs a raise more than the middle class, after eight years of Obombanomics.

Cholo's oeuvre, my goodness, it's as wonderful as yours Tommy. This place is now the Cholo show. Again, Nice!

Posted by Tom Cushing, a resident of another community,
on Apr 6, 2016 at 10:17 am

Well, hi there 2D -- long time no bleat. You've been out in the pasture an awfully long time, conversing with those sheep. Please recognize that they're easily spooked by specters like that inflation boogeyman they predicted in 2008 and every day since then -- but who has has never showed his face. And he won't here, either. In fact, he never has in any significant way because of a min wage increase. That's called evidence-based analysis, and it's why I link to many of my sources, so people can check for themselves. It beats your stampede of ruminant ignorance, every time.

Folks have always made up stories to try to explain what they don't understand. Maybe go back to the earlier blog on the mythologies of the min wage, for a primer on how this stuff works.

Sheeple who've never lived on a minimum wage are also often happy to advise those who do earn it that all that stands between them and the robot apocalypse is their poverty -- so enjoy it! That's nonsense, too. The robots will come for all of us soon enough, but that won't be driven by the minimum wage. Much higher-paid work will be replaced long before the burger flippers, as it has been in the past, because there's more money in replacing a $30/hour worker than one making $10/hour or $15. Any good capitalist knows that.

And enough already with this silly "Socialist!" cry as you reach for your peasant pitchfork. You're stuck in the 1950s. That label doesn't fit, it has long since lost its punch anyway, and few outside the right-wing echo chamber are kept in fear of it. BTW, unless you're old enough to know better, you've got no business addressing me in the diminutive. It makes you look desperate and childish. Save that stuff for your twitter flock.

So, howsaboit this: calm-down, read-up, and come on back the next time they let you off the mountain.

Posted by BradUffinger, a resident of Danville,
on Apr 10, 2016 at 12:43 pm

This is a socialist blog, Dirka is right! At least Bernie Sanders is honest about it.

You sir, have a disingenuous approach to supporting failed liberal policies.

Posted by Tom Cushing, a resident of Alamo,
on Apr 10, 2016 at 4:34 pm

HI Brad -- Thanks for commenting.

This blog pulls no punches about its liberal leanings (it's right there in the intro), and I suppose some failure is in the eyes of the beholder. But you surely know the differences between liberal and socialist -- hell, I don't even like high-speed rail. I've written more than 250 of these missives -- would you cite a few of examples for your claim of socialistic advocacy?

Posted by BradUffinger, a resident of Danville,
on Apr 10, 2016 at 6:06 pm

There are three types of lies:
Lies, Damn Lies and Statistics - Twain

This is one of your dirty little tricks.

Lawyers are like other people--fools on the average; but it is easier for an ass to succeed in that trade than any other.

Posted by Tom Cushing, a resident of Alamo,
on Apr 10, 2016 at 6:48 pm

Okay Brad, I get that you don't like liberals or lawyers. You're missing out on a lot, and that's your right.

But let's review the bidding: you stated that "this is a socialist blog." I asked if you had any examples to back that claim (that's Some tricky trick). I guess that your response above counts as a "No" answer.

Posted by Michael Austin, a resident of Pleasanton Meadows,
on Apr 10, 2016 at 7:25 pm

Michael Austin is a registered user.

I have never known A lawyer that was a fool!
"Other people" I have met are fools!

Posted by BradUffinger, a resident of Danville,
on Apr 11, 2016 at 9:04 am

He writes with a forked tongue, a snake. Death by a thousand cuts, this is the strategy of the Tom Cushings of the world. A former lawyer who still works with lawyers, hmmm, it's naive to expect anything honest and straightforward from this guy. The cat is out of the bag Mr. Cushing. Anyone can read your old entries and see that you are a democratic socialist.

You have a vision of a regulated utopia.

The hard core reality is that the Democratic Socialists will regulate businesses out of existence and then, just like GM and the others, there will be no one left to pick up the pieces but the government. My regional mid-size business has taken a beating under this admin.. Our answer was to move to contractors for a lot of the work. No we have a semi disposable workforce, which is a big-time loss for people who used to be employees.

It is still early enough to turn this around, but if you vote with Cushioning you doom this country and dash the hopes of future entrepreneurs who are not funded by big venture capital.

Your gadfly partner Cholo can take it from here. Your blog is not good for advertisers, that's for sure. Without the laughs from the Cholos of the sphere you would have nothing here. The publisher should pull your blog. I would never advertise here, given what I read. Keep it classy...

Posted by Tom Cushing, a resident of Alamo,
on Apr 11, 2016 at 9:39 am

Brad, really? This is 'your' best shot?

You know what I like about lawyers? Evidence. If they make a claim, they know they have to back it up. Now, there are at least ten claims in your post (probably more, I lost interest) and Not One Shred of evidence. "It's obvious" is not evidence -- it's a punt. Pretty worthless.

BTW, a few people have been calling for boycotts and/or my head since the first installment of this blog, 264 editions ago. It seems some folks would prefer to never be exposed to anything that might challenge their thinking. The paper and the blog are still here, with pretty healthy clickage -- how 'bout that?

Be sure to thank 2D for drafting your comment, although he did you no favors.

Posted by Dave, a resident of Danville,
on Apr 12, 2016 at 12:38 pm

One simple truth: If businesses paid all workers a living wage (really, something more than the poverty level), government wouldn't have to intervene by setting a wage floor. But, they don't. They can make all kinds of excuses for why they can't -- which usually involve blaming the government. All kinds of excuses, except that they have paid their senior management too much. Once they own up to the fact that, often, they just don't value their lower-paid employees very much, we can begin to have an honest conversation about wages in this country. And as long as capital is valued more greatly than labor, that will be a difficult conversation to hold.

Posted by Cholo, a resident of Livermore,
on Apr 12, 2016 at 3:50 pm

alls i can say is that folks sure know how to tease a person...tee h..h..

you c...that's the kinna person i yam...

i res my case...signed, the C

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