Forget California dreaming, real nightmares are on the horizon for Los Angeles after the nation’s second-largest city voted to increase its minimum wage to $15 per hour over the next five years.
Some San Francisco employers and workers have already seen the adverse responses to the minimum wage hike in that city. Several restaurants have closed and a famous, trendy bookstore is in jeopardy.
Through a gradual increase beginning next year, Los Angeles’ minimum wage will rise to $10.50 on July 1, 2016, followed by consecutive increases each year afterward to $12.00, $13.25, $14.25 and finally hitting $15.00 on July 1, 2020. Beginning in 2022, the minimum wage will continue to increase annually indexed to inflation.
The L.A. Times published a Q&A on the wage increase to answer some common questions about who may get an exemption and who will be affected. However, all employers will be affected, including small businesses. Those with fewer than 25 employees will receive an additional year to comply with wage increase, however.
Advocates for higher minimum wage are celebrating what they call a victory for the estimated more than 40 percent of the city’s workers who earn less than $15 per hour. L.A. follows several other West Coast cities including San Francisco, Oakland, and Seattle, which have approved increases. Dozens of other cities are considering raising their minimum wages and advocates think this could set off a wave of minimum wage increases across Southern California as groups pressure their lawmakers to follow L.A.’s lead.
As we reported recently, a big cohort of actors revolted over talks of a state-wide $9 minimum wage because it would bring the curtains down on opportunities in small and community theaters which are allowed to pay actors, stage hands, and crew up as much as $7 per performance. They’re not looking to raise a family on these stipends but to hone their skills, gain experience, and network. If $9 would be detrimental what will $12.00 or $15.00 mean for them?
Megan McArdle makes a compelling case in Bloomberg for why the long-term impacts of these hikes may be harmful, especially to those who supposedly benefit:
As I've written before, the existence of studies that seem to show minimal economic impact from minimum wage increases has caused many policy advocates to act as if we can assume that very high increases, like this one, can transfer money from the pockets of the affluent into the pockets of the poor without causing big disruptions. This is wildly beyond what that evidence shows, or could show. The studies in question covered small increases in the minimum wage, over short time frames. They cannot tell us what will happen with big increases over longer time frames … It is over longer periods that a minimum wage hike is likely to be most disruptive.
When the minimum wage goes up, owners do not en masse shut down their restaurants or lay off their staff. What is more likely to happen is that prices will rise, sales will fall off somewhat, and owner profits will be somewhat reduced. People who were looking at opening a fast food or retail or low-wage manufacturing concern will run the numbers and decide that the potential profits can't justify the risk of some operations. Some folks who have been in the business for a while will conclude that with reduced profits, it's no longer worth putting their hours into the business, so they'll close the business and retire or do something else. Businesses that were not very profitable with the earlier minimum wage will slip into the red, and they will miss their franchise payments or loan installments and be forced out of business. Many owners who stay in business will look to invest in labor saving technology that can reduce their headcount, like touch-screen ordering or soda stations that let you fill your own drinks. These sorts of decisions take a while to make. They still add up, in the end, to deadweight loss — that is, along with a net transfer of money from owners and customers to employees, there will also simply be fewer employees in some businesses…
There are secondary effects beyond the employment market too… There's no question that the wage increase will transfer money around within the economy — out of the pockets of commercial landlords, for example, and into the pockets of folks who own real estate in low-rent districts. But little evidence has so far been offered that any boost in local spending will cancel out the deadweight loss, much less exceed it.
McArdle makes the observation that the effects of an increased minimum wage occur over time. It may not be mass unemployment, but it will make paying more for services and products and seeing jobs cut over time. An unrealistically high minimum wage makes replacing workers with technology attractive to even the most well-intentioned bosses. Lawmakers and proponents are banking on the delayed reaction to the hikes will spread the pain and make the dislocations less noticeable.
We’ve seen companies like Walmart and Facebook increase their minimum wages without government mandate. This trend will continue but proponents of higher minimum wages don’t want to wait until employers can determine their ability to remain solvent, or at least not drastically cut jobs, after the hikes.
It’s easy to cheer a big public policy change in the press, but who will cover the stories of small business owners who simply can’t afford to operate in the red and the employees who go from the prospects of $15 per hour to unemployment wages? While most of the change may happen at the margins, they represent people who I bet would rather earn their current rate than earn $0, which, after all, is the real minimum wage.