Now that California is on the verge of increasing its minimum wage to $15 per hour, economists are warning the state that it "has no idea what it's getting into."
That caution comes from Charles Lane, an economic policy and editorial writer for The Washington Post. He is strongly advising against the wage proposal:
There’s a total lack of evidence that the potential benefits would outweigh potential costs — and ample reason to worry they would not.
Lane says it's simple Economics 101: "The basic trade-off... is that the increased earnings that a higher minimum wage gives workers at the low end of the income scale might be offset by pricing those workers out of jobs they could have had at less than the new, higher minimum wage."
This is how it works under moderate wage increases, Lane adds. But what California is proposing is not moderate to say the least; it's huge.
Lane states that any industrial democracy typically sets its minimum wage to half the national median wage. That's the model. However, when California's top minimum wage is set by 2022, the state will be working at 69% of its median hourly wage. There is no model for them to draw possible outcomes in this scenario:
In short, California has no idea what it’s getting into, because it can’t; there is simply no experience from which to learn.
But what is for sure, according to Lane, this increase is going to act as incentive for employers to begin investments into "labor-saving technology," that is, more automation, less people. He points to a 2013 paper by MIT and Texas A&M economists that demonstrates this negative impact of higher wages:
They estimated that a 10 percent permanent increase in the real minimum wage reduces employment by about 0.7 percent after three years, with the greatest impact felt by younger workers and in industries with a higher proportion of low-wage workers.
Lane says that in the end, the whole proposal comes down to politics. He cites the Bernie Sanders-Hillary Clinton primary battle as an influential factor in Gov. Jerry Brown's move towards a wage increase.
"It does not represent an exercise in evidence-based policymaking," Lane writes.
Unfortunately, the very people that are supposed to benefit from higher wages (entry-level, low-income workers) are the ones who are being put most at risk for losing their jobs if the measure passes. And yet, the Democrats who run the state will not be affected at all and will be viewed by their supporters as saviors who at least tried to give them the golden egg.