Why Minimum Wage is Not a Slam Dunk

Two events rocked the nation yesterday.  The first, of course, was Villanova winning the N.C.A.A. Men’s Championship basketball game on a buzzer-beating 3-point shot.  The second, perhaps less publicized but no less momentous, was California Governor Jerry Brown signing into law a statewide increase in the minimum wage from $10 an hour to $15 an hour by 2022  (photo above).  While it may have been since 1983 that men’s college basketball has seen that kind of finish, California has never seen such an impact on minimum wage.

The New Deal

Setting aside forced sports analogies, minimum wage law is a really big deal.  It’s been a big deal since the New Deal passed in the 1930s. President Franklin D. Roosevelt declared that all American workers should be entitled to “living wages”:

…and by living wages I mean more than a bare subsistence level-I mean the wages of decent living.

Of course, “living wages” in 1938 equaled 25 cents per hour.  Today, U.S. minimum wage stands at $7.25 per hour.

Brief Overview of Minimum Wage

Minimum wage is a complex topic that often gets distorted by politicians and those who rely solely on their gut.  But to be fair, even economists cannot agree on whether it helps or hurts our economy.  Here are four LinkedIn authors who give good reasons for their stance on minimum wage:

• Jerry Nelson, a freelance journalist, argues that a living wage is not just a political or economic issue -- it's a moral imperative.  Nelson believes that everyone should have the right to a standard living wage, much higher than the current minimum wage.   
• James J. McDonald, Jr., an attorney, contends that a minimum wage increase will have collateral consequences, particularly in a tech-focused society where our jobs will not be outsourced to other humans with lower wages, but lost to machines with greater productivity and specialized AI.
• JD Miller claims that the minimum wage has forced job losses in the Seattle restaurant industry not seen since the Great Recession. 
• Jonathan Ozovek does a fantastic job debunking the common myths of minimum wage.  

The Arguments

Proponents of the “Fight for 15” cause support a minimum wage of $15 per hour.  They claim that:

• Higher wages means workers will have more disposable income which can lead to a higher demand of goods or services in a consumption based economy.

• The income equality gap is growing while CEOs disproportionality earn too much; and

• Workers should be able to afford to live above the poverty line (but economists disagree on whether minimum wage has any real impact on poverty overall).

 Opponents of any increase in minimum wage claim that minimum wage:

• Causes unemployment and underemployment.

• Disproportionality affects small businesses.

• Hurts the economy.

What Economists Say

Economists agree on the theory behind minimum wage.  The standard model of competitive labor markets predicts that a higher minimum wage will lead to job loss among low-skilled workers.  The reasons are two-fold:  First, employers will substitute away from the low-skilled labor that is now more expensive towards other inputs, such as equipment or other capital (substituting labor for alternatives).  Second, the higher wage and new input mix implies higher prices, in turn reducing product and labor demand. 

However, as labor economist and UC Irvine professor David Neumark points out, “the labor market is more complicated.”  Neumark concludes that a 50% increase in the minimum wage—which is the same percentage increase in California over the next five years—will reduce employment among the least skilled workers by 5% to 10%.   On the other hand, some argue that the loss in employment is exaggerated.  For example, in 2014, the CBO did a study that estimated a $10.10 US minimum wage would reduce employment by 500,000 workers (but representing only 0.3% of the labor market).  

According to The Economist, studies demonstrate that small, incremental changes to minimum wages do not destroy a significant number of jobs.  However, any increase in the minimum wage on the order of magnitude of 50% or more—such as what will happen in California—have not been thoroughly vetted and therefore the impacts are not known.  In fact, a survey of top economists by the University of Chicago demonstrates how uncertain economists really are about moving to a $15 per hour minimum wage:

Business Owners Will Be Affected

Regardless of theory, the new minimum wage will impact almost all businesses. As a business owner, it’s important for you to know which California cities will increase the minimum wage and when the statewide controls will take effect.  Cities such as San Francisco and Los Angeles have already passed minimum wage increases to $15 an hour and will be phasing them in faster than the rest of the state.  The information below will summarize which cities have already passed minimum wage increase and when they will be phased in. 

OVERVIEW OF CALIFORNIA MINIMUM WAGE LAWS

The current state minimum wage is $10.00 per hour, which is about $20,000 annually.  It will move to $15 per hour by 2022, which is $30,000 annually.  This graph will hopefully provide some context (Note: *San Francisco will index its minimum wage increase to the Consumer Price Index after 2018):

The State of California

California’s most recent minimum wage increase was passed in 2013.  Now that this new minimum wage law has been signed into law, minimum wage increases will be phased in over the next six years until it reaches $15 an hour.  For companies with fewer than 25 workers, the increases will start in 2018 and end at $15 an hour in 2023.  Below is a tentative schedule of the minimum wage increases that will occur (25 workers or more):

San Francisco

San Francisco minimum wage ordinance applies to an employee performing at least two hours of work per week.  Below are the scheduled rate increases: 

*Beginning on July 1, 2019, and each year thereafter, the increases in the minimum wage will be indexed to the Consumer Price Index, taking into account any increase.

Los Angeles

Los Angeles passed a minimum wage ordinance that takes effect on July 1, 2016.  It applies to an employee performing at least two hours of work per week.  This includes full-time, part-time, temporary employees and non-profit organizations.  Most importantly, depending on the number of employees in a company, the scheduled minimum wage increases will vary.  If you are a restaurant employer, tips will not count towards an employee’s minimum wage pay.  Below are the scheduled rate increases:

Scheduled minimum wage increases for employers that employ 26 or more employees:

Scheduled minimum wage increases for employers that employ 25 employees or less: 

Santa Monica

 In January 2016, the City of Santa Monica approved a minimum wage ordinance that will gradually raise the minimum wage to $15 an hour by 2020.  The ordinance takes effect July 1, 2016 and applies to most businesses and hotel workers.  Although similar to the minimum wage law passed in the City of Los Angeles, there are some important differences.  First, there is a one-year delay ($15 by 2021) for businesses with 25 or fewer employees and for qualifying non-profit organizations.  The ordinance also includes a provision that allows employers to pay 85% of the minimum wage for 480 hours or six months—whichever comes first—to first-time workers. 

San Diego

In 2014 the City of San Diego approved an ordinance to raise the minimum wage to $11.50 an hour by January 2017.  However, implementation of the ordinance was delayed.  Because opponents of the ordinance were able to collect 33,866 valid signatures in fewer than 30 days after the ordinance was finally approved by the city council, the ordinance cannot take effect unless voters approve it.  However, the battle for an increase in the minimum wage in San Diego is not over yet.  A measure to raise the minimum wage to $11.50 by the year 2017 will be on the June ballot.

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Cristian Reyes is a law clerk at Harvey Esquire APC.  He received his JD at Southwestern Law School in Los Angeles and is currently working on getting his MBA at the Drucker School of Management.    

Chris Harvey is the principal attorney at Harvey Esquire APC where he focuses his practice on entrepreneurs and small business owners.  Chris received a JD from University of San Diego School of Law and a bachelor's degree, magna cum laude, from Missouri University of Science and Technology.