Last Friday, California’s Legislature passed a bill raising the state’s minimum wage to $10 per hour by 2016, which will be higher than the federal mandate of $7.25 per hour and the highest in the nation. The increase from the state’s current $8 per hour minimum wage will be in two separate $1 increments over the next three years.
Nationally, only about 10% of the workforce earns a minimum wage. Clearly, an increase in the minimum wage raises the cost of production and further distorts market activity between employers and workers. If there were not already reasons for entrepreneurs to leave California and go to places with lower costs to produce, like Texas, this might be the last straw.
Some may argue that the Texas Legislature should pass a similar law to raise the state’s minimum wage, but let us consider several indicators that may have you singing a different tune.
This map indicates that there are 18 states with a minimum wage higher than the federal mandate. Next, this one shows the employment-population ratios for all states. Finally, check here to see the unemployment rate in all states.
It is clear that many states with a higher minimum wage have a lower employment-population ratio and a higher unemployment rate-both indicative of a weaker labor market. This does not necessarily reveal whether a higher minimum wage causes a higher unemployment rate, but it does give a strong relationship between the two.
In a recent paper, Neumark, Salas, and Wascher find that “minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.”
In other words, a minimum wage picks winners and losers not by market forces but by government decree.
In this case, if California raises their minimum wage to $10 per hour and the output of workers in those positions do not equal this 25 percent cost increase, there will be many unemployed low-skilled workers either now or in the future. Although research in this area is mixed, we must also consider the opportunity costs of a higher wage mandate and the entrepreneurial incentive to move to other states.
Currently, California’s unemployment rate is 8.7 percent and has a minimum wage of $8; whereas, Texas’ rate is 6.5 percent and matches the federal minimum wage of $7.25. If California’s Governor signs this legislation and increases this wage margin over the next three years, we will have a good idea where entrepreneurs will decide to innovate, imagine, and employ workers: Texas!