There is a misguided assumption by some policymakers in the California Legislature that raising the minimum wage will have a benign impact on the labor market. In fact, some experts go as far as saying that increasing the minimum wage will help the economy. However, years of research prove the contrary; raising the minimum wage harms small business owners and entry-level employees – the exact population that an increase is purported to help. (AB 10, if passed, would raise the minimum wage every year automatically; a hearing is scheduled for this week.)
Increasing the minimum wage discourages employers from hiring low-wage entry-level workers. One-half of minimum wage employees are younger than 25. Increases in the minimum wage reduce employment prospects for this entire demographic.
Study after study shows that minimum-wage increases do more harm than good. Low-income families are hit hardest by an artificial wage increase. Businesses are prevented from hiring low-income workers because of cost pressures. They turn instead to outsourcing and other mechanisms to run operations. Low-skilled workers are prevented from gaining valuable work experience, and entry-level workers also endure hardship with each obstacle instead of gaining a foothold to a lifetime of gainful employment. The reality is that entry-level income workers need job opportunities and some level of certainty about take-home pay.
Raising the minimum wage could have two very detrimental impacts. First, increasing the minimum wage will increase workers’ hourly rates; workers will take home less money at the end of the pay period if their employer reduces their hours to manage costs.
Added labor costs
Second, employers – especially small businesses with tight profit margins – will be forced to lay off employees due to added labor costs. The net effects of these actions are sure to only increase our state’s already high unemployment rate.
If business income decreases due to higher labor costs and unemployment goes up, tax revenues will decrease. There also will be an increased dependence on the state’s dwindling social services. That would not be welcome news for policymakers grappling with the $26 billion deficit.
While there are winners and losers in every policy proposal, it is clear that the losers in this case are young entry-level workers. According to the Bureau of Labor Statistics, the unemployment rate in March 2011 for African-American teens (both women and men) ages 16 to 19 was 42.1 percent nationally and 34.5 percent in California. With such extraordinary rates of teen unemployment, creating barriers to employment at this time should be unthinkable.
In recent years, Los Angeles has made great strides in putting young people to work through the Hire L.A.’s Youth program. This partnership between the Los Angeles Area Chamber of Commerce, Mayor Antonio Villaraigosa and the city of Los Angeles encourages employers to provide summer employment for more than 10,000 L.A. teens. This program allows youths to begin to develop the skills that will make them higher-wage earners in the future. Building the work-force skills of our young people will pay long-term dividends for Los Angeles. Businesses continually rank a region’s skilled work force as a top consideration when deciding where to locate or expand. Raising the minimum wage could greatly hurt this program and others like it because there will be fewer opportunities due to increased labor costs.
There are several other policies that work in the free market and are better suited to help low-income workers. First, encouraging and incentivizing employers to invest in the training of basic skills will help develop an educated work force and give employees the tools they need to achieve upward mobility. This can be done by expanding the Hire L.A.’s Youth program to all of Los Angeles County.
Second, the state can focus more on improving upward mobility of Californians through improved education. The Los Angeles Economic Development Corp. identified many education improvements in its Los Angeles County Strategic Plan for Economic Development, including offering more science, technology, engineering and math at schools.
Lastly, state government can provide incentives aimed to encourage job growth, particularly within the areas and industries in which California has a competitive advantage, such as tourism, agriculture and emerging clean technology. If the goal is to reduce poverty, the earned income tax credit, implemented at the federal level and augmented by many states, has been shown to be an effective policy.
Putting Californians back to work is the quickest way to improve our economy. Elevating the minimum wage does little to provide upward mobility for Californians. By improving education, work force training and employment opportunities, Californians can reach their true earning potential.
This is a critical time for many people trying to find a job. The latest job numbers reflect some progress in hiring, but there is an enormous challenge ahead. From an economic standpoint, it is foolhardy to believe that raising the minimum wage and increasing employers’ costs is a policy that will result in more jobs for Californians.
David M. Smith, Ph.D., is Associate Dean of Academic Affairs and Associate Professor of Economics at Pepperdine’s Graziadio School of Business and Management in Malibu.
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- Forced Wage Raise Means Job Losses
- Minimum Wage Hike Could Hurt Working Poor More Than Help
- San Jose’s minimum-wage increase a cautionary tale for Los Angeles.
- Money Well Spent?
- Economic Forecast & Trends 2017: Economic Forecast: A Discussion with Carmen Cole
- Maximum Advantage
- Employers Wage War Against Minimum Indexing