The Democrat Governor of California signed off on raising the minimum wage, and now Californians are suffering a major setback! Gov. Jerry Brown D-California signed a bill that will raise the minimum wage from the current $10.50 per hour to $15.00 per hour by 2022. The raise is not sustainable for the small business model in California, and people are finding it much harder to find work. What good is the higher minimum wage if you're unemployed? Many of the citizens working for minimum wage are in the service industries such as the hotel and food services, the job market is shrinking, and people are struggling to find work. The small businesses can't afford to pay people as much and still be profitable enough to remain open.
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Food service establishments run on an average profit margin of 3%. Supplies and labor make up 2/3rds of expenses. By raising the labor cost by 50%, these companies will face harsh choices. Do we keep the staff we have or fire 1/3 of the team? Or do we try to save money on supplies? Both of these decisions may adversely affect the customers with lower quality product or service.
An article in Forbes stated that the $15.00 minimum wage would cost California an estimated 400,000 jobs. It refers to a study by the Employment Policies Institute (EPI) where every 10% rise in minimum wage results in a 5% loss in jobs. It has already begun; a team of economist from the prestigious Harvard Business School and Mathematics Policy Research determined the cause of a rash of business closures was related to the rise in the minimum wage. Other companies left the state to find more affordable labor. Many in the food-industry are referring to this as the “Death march” of restaurants.
The fallacy of the argument that the government needs to raise the minimum wage to a livable income is wrong. The minimum wage was never intended to be a middle-class living wage. It was put in place to benefit the worker and employer equally. For the employee, it gives them the opportunity to learn a marketable skill while earning some money. It can provide an opportunity to “move up” in the company. For the employer, it gives them an incentive to hire unskilled workers and train them to move up in the company as they become more proficient in their respective tasks. The concept of minimum wage requires minimum skills but gives people the chance to work up. If someone working in fast food wants to make a difference in their career, then they will work up to become a manager or better. If they have no incentive or drive to succeed, then they remain at the low pay job doing the no skill work.
When Seattle raised the minimum wage, there was a clear hit to the lower paid people. Many restaurants hired more experienced staff, who had a proven ability to produce more income for the company than they cost. This left the new applicants without a way to “break in.” The upside was skilled workers were more in demand and were given higher hourly wages. The downside was that new entrants to the workforce were not able to get a job. This led to a significant rise in unemployment for young workers in Seattle. It in effect took out the bottom rungs of the employment ladder.
This bill will not have the statewide positive effect purported by the media. Living expenses in many parts of rural California are on a par with the rest of the country. Places such as Los Angeles, Silicon Valley, and other coastal cities have a much higher than the national average cost of living. To mandate a statewide rise of the minimum wage will hurt towns in the rural areas in the state.
Businesses need to make a profit, and this cannot be argued. Earning a profit means that employees need to produce more than they cost in wages, benefits, and government fees. No business can stay afloat for very long if expenses are higher than income. California removed a differential minimum wage for young workers. That move will adversely affect minority youths trying to enter the workforce.
Another issue is that skilled employees who work for $12.00 per hour will want a corresponding pay raise when the minimum wage raises. They have skills and experience that should be rewarded. As happened in Seattle, the skilled workers will move to better-paying jobs. Employers will not be able to compete with lesser qualified staff and most likely will either go out of business or hire more skilled workers. The entry-level position will not be there for young job seekers.
Drastically raising minimum wages will cause companies to cut back on employment. Those businesses that can relocate to different states will exit California and take their jobs with them. Other states will welcome the new companies, sometimes with tax incentives. Rural areas in California will pay higher wages that are unsustainable in their economies.
This will lead to a downsizing of employees. Governor Brown left an out for the state. He can suspend the wage hikes if there is an economic downturn.
Losing 400,000 jobs sounds like an absolute economic downturn and disaster.