In April 2016, California Gov. Jerry Brown signed the state’s $15-an-hour minimum wage law into effect.
As a consequence, the minimum wage went from $10 an hour to $10.50 an hour for businesses with 26 or more employees on January 1, 2017. On January 1 of this year, the minimum wage was hiked again to $11.00 an hour for larger employers and $10.50 for businesses with 25 or fewer employees.
Federal jobs data for 2018 suggests that California’s rural manufacturing base might be getting hammered by the higher mandated minimum wage.
Unless a future governor waives the scheduled increases due to economic weakness, the government mandated hourly wage hikes will keep coming—$1 per hour every year—until they reach $15 an hour four years from now for large employers with smaller employers hitting $15 in 2023. After that, future increases are pegged to national consumer price index for urban wage earners and clerical workers.
Many factors affect regional job creation and wage growth. Availability of suitable labor, energy and land costs, infrastructure, including access to clean water and well-maintained roads, as well as state and local taxes, the regulatory burden and the lawsuit environment. Measured against these factors, California has significant challenges.
Before listing the negative pressures on California’s business climate, it is important to note that the state has tremendous assets: Hollywood, Silicon Valley, a mild climate, and access to capital as well as to dynamic Pacific Rim trading partners. These assets have combined to make California America’s idea engine, boosting incomes at the high-end even while California’s middle class and entrepreneurs have continued to move out of state.
While California’s state college and university system is highly regarded nationally, its public K-12 system is at the bottom of most surveys.
California’s 2017 retail electric prices were 89 percent higher than in its peer competitor, Texas. California’s gasoline prices remain the highest in the contiguous 48 states, at $3.619 per gallon of unleaded, some 26 percent higher than the national average of $2.865.
California’s once-vaunted water storage and conveyance system has been essentially frozen in time for decades, as the state’s politicians spend billions on environmental programs and studies and precious little on expending and securing California’s water supply.
California’s highway system, once the envy of the world, has similarly been put at the bottom of the priority list, regularly being ranked at the tail end of national surveys. Further, the state’s union labor agreements and environmental approval maze contribute to the state’s road maintenance costs being almost 40 percent higher than the national average.
As for state and local taxes, Forbes ranked California as 45th-worst in 2016.
The U.S. Chamber of Commerce meanwhile rated California as having the 47th-worst lawsuit climate in the nation last year.
The regulatory burden on small business was studied in a report authorized by the California legislature 10 years ago which found that small businesses faced a complex puzzle of state and local rules that cost about $134,000 per year in compliance costs.
And now the ongoing yearly rise in the minimum wage adds one more key inhibitor to California’s economic growth, the effect of which will be most heavily felt in the approximately one-third of the state where the cost of living and wages are closer to the national average than are California’s metropolitan areas.
According to the U.S. Bureau of Economic Analysis, in 2016, the cost of housing in California’s metropolitan areas was 60 percent higher than in its small towns and rural areas. Including all goods and services, California’s cities were about 16 percent more costly than in the surrounding small town and rural areas.
California’s minimum wage law does not take this metro/rural cost difference into account, treating a state with the nation’s greatest population and third-largest land mass as if it was a solitary urban county.
By way of example, the U.S. Bureau of Labor Statistics reports that in May 2017, the median wage for 4.4 million hourly-wage workers in California was $19.04 per hour. In Fresno, California’s 5th-most-populous city, the median wage for the 373,000 workers there was $15.80 per hour, 17 percent below the state average.
Yet, the new minimum wage in Fresno for a larger employer is $11 an hour, the same as it is in Los Angeles or Silicon Valley. This betrays an economic illiteracy bordering on the insane.
Even New York’s legislature, when it passed a similar minimum wage hike over several years, thought to include regional variations that account for the huge differences in the cost of living between New York City and other regions of the Empire State.
Rural areas across America are frequently home to manufacturing facilities, sited to take advantage of lower land and labor costs. California’s aggressive minimum wage hike schedule is likely hitting its remaining rural manufacturing base hard. Since the end of the Great Recession in 2009, California manufacturing employment has seen a modest, but steady recovery, adding jobs every year through 2017. But, so far in 2018, California manufacturing has started to lose jobs and, if the trend continues, it will see its first loss in employment in nine years. By comparison, the U.S. has added 193,000 manufacturing jobs through July 2018.
Many politicians seek to win votes by giving stuff away. In the case of minimum wage laws, they are substituting political judgment for the considered calculations of both employer and employee operating in a freely decided transaction of money for labor.
But, California’s minimum wage hike has as much or more to do with powerful government labor unions than it does with the young workers starting out on their first job at minimum wage. This is because a large number of state and local government union contracts are linked to the minimum wage. This is why the California Department of Finance estimated that the minimum wage law would end up costing state government an additional $3.6 billion annually. In addition, the minimum wage law will also ripple into the cost to employ the state’s 300,000 K-12 public school teachers, with the added cost to the beleaguered California taxpayer ranging from $6 to $10 billion.
Thus, California’s $15 minimum wage law will have two big effects: it will greatly increase labor costs in small town and rural California while hitting taxpayers for as much as almost $14 billion a year for public school teachers and other government employees.
This commentary was originally featured in Forbes on August 6, 2018.