California legislators reached a good faith agreement this past weekend to raise the state minimum wage from $10.00 to $15.00 by 2022. If this agreement becomes law, California will have the highest state-mandated minimum wage in the country. AEI Scholar Mark Perry comments on this latest development and what it could mean for California and the United States’ economies.
It’s important to realize that [California’s] labor market is pretty weak… For many of smaller metro areas with high jobless rates already, they could really suffer from a $15 an hour uniform increase across the state, especially considering that the cost of living is lower [in those cities], and those labor markets can’t support a $15 minimum wage (compared to high-cost areas like San Francisco and Los Angeles)…
The increase from $10 to $15 an hour is a 50% increase in labor costs, and would increase the cost of each full-time minimum wage worker by $10,000 per year (plus another 10% on top of that for legally mandated employer costs). Keep in mind that most small business, especially restaurants, operate on very low, razor-thin profit margins of maybe only 5% or less. Since labor is a major expense for small businesses, a 50% increase in some of their labor costs might be too much of a burden, forcing many restaurants and small retail outlets to close down (and making it unappealing for new businesses to open). It’s pretty easy to go from 5% positive profit margin to negative profits (losses), even in good times. But when restaurants face increases in labor costs for some workers of 50%, even when that happens over several years, that often is not workable.
In the end, it’s not so much about politics or social justice, it’s about business/restaurant math. And a $15 minimum wage in CA is some very bad math for business survival and expansion.
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