Driving Up Labor Costs Drives Down Jobs

Gov. Jerry Brown has advised lawmakers to expect a slowdown in tax revenue, a warning he issued weeks after he signed into law a bill raising the state’s minimum wage to $15 an hour by 2022. Maybe he should consider that there’s a connection.

When Brown signed the minimum wage hike, he said, “Economically, minimum wages may not make sense. But morally, socially and politically, they make every sense.” He should have stopped at “economically.” Minimum wages are indisputably economically unwise. Whenever – and wherever – they are raised, they act as an overbearing tax on businesses and consequently have a harmful effect on jobs.

Of course, increasing the pay of those in the bottom tier of earners sounds compassionate. But it’s not that simple. First, not every worker earning the minimum wage is from a low-income family or is a family’s sole source of income. Quite often, minimum-wage employees are teens from middle- and upper-class families working for extra cash. The Bureau of Labor Statistics reports that 19 percent of Americans earning the federal minimum wage or less are 16-19 years old.

Second, and more importantly, forcing businesses to pay more for labor destroys career opportunities and jobs. It is an act of cruelty toward the very people it is intended to help, says George Mason University economics professor Donald Boudreaux.

When presented with the mandate to increase their labor costs through minimum-wage hikes, businesses inevitably have to cut jobs. The amount of money a business can spend on labor doesn’t magically increase when the minimum wage is moved upward. To stay within a budget that allows it to make a profit and remain in business, a company will be forced to let some workers go. A business that can afford to employ 10 workers at $10 an hour – the current minimum wage in California – will be able to afford only six or seven on its payroll at $15 an hour.

To replace lost workers, businesses are sure to automate.

“With government driving up the cost of labor, it’s driving down the number of jobs,” Carl’s Jr. and Hardee’s CEO Andy Puzder told Business Insider in a March story about rising minimum wages. “You’re going to see automation not just in airports and grocery stores, but in restaurants.”

We will also see lost opportunities for advancement, especially for those whose skills are worth less than the minimum wage. If an employer has no choice but to pay $15 an hour, he or she will likely hire more productive, higher-skilled workers, leaving the less-skilled to collect unemployment. Workers who are supposed to receive the greatest benefits from the law will actually take the hardest hit.

Larger companies also have another option: They can outsource their work to foreign countries.

In any event, the end result of the higher minimum wage is fewer Californians working. The American Action Forum says as many as 700,000 jobs will be lost under a $15-an-hour minimum wage.

While that’s a projection, this is a fact: Seattle lost more than 10,000 jobs from the beginning of September 2015 to the end of November, just months after the first phase of a minimum-wage hike took effect April 1. The job losses from April 1 to the end of December, American Enterprise Institute economist Mark Perry tells us, represented the biggest drop in employment in Seattle in any nine-month period since 2009. Over that time, the city’s unemployment rate grew a full percentage point.

Furthermore, according to Perry, the full increase, from $9.32 to $15 an hour – a 61 percent jump – will eventually swell businesses’ annual labor costs “by a whopping $11,300” per full-time, minimum-wage worker. Those that can’t afford the escalating costs will have to drop workers – or leave California altogether.

Either way, there will be fewer workers paying state income taxes, making the revenue downturn the Brown administration is projecting even worse, and providing lawmakers with a handy excuse to raise taxes.

The minimum-wage issue isn’t about lost government revenue, though. Indeed, Sacramento should get by with fewer taxpayer dollars and be less of a burden on the private sector. The issue is a governor and group of lawmakers who don’t appreciate the harm they are doing to this state. Until they start enacting policies that makes economic sense, California’s hole will only grow deeper.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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