California's Minimum Wage Hike May Have Just Ruined Its Economy


California Governor Jerry Brown signed a bill Wednesday morning that will raise California's minimum wage to $10 an hour by 2016. This will make California's minimum wage the highest of any the state's. However, the quality of life will not increase much for those who earn minimum wage. The $10 wage would still keep employees who work full-time minimum wage jobs under the poverty line if they are supporting a family of four. By 2016, if the Consumer Price Index estimates hold true, core goods will cost 8.2% more, negating about a dollar of the hike, dragging a family of four even farther into the hole.

The crux here is that one can't live on minimum wage without Federal Assistance. California State Senate President Darrell Steinberg is right when he says "after six years, an increase in California's minimum wage is the right thing to do." It's only meaningful, however, if it's a significant increase.

The flip side of this is that for the state's small businesses, this could be a breaking point. This symbolic hike doesn't help the working poor, and hurts the 98.8% of businesses in the state with fewer than 500 employees.

California is already close to the top on the list of the "worst places to start a business." Regulation costs account for a 3.8-million-person loss of employment in the state, coupled with high corporate taxes. For a state that can't afford to provide greater public aid, it's best not to run those that can out of town.

Nicholas Kristof, in his much-hated pieces in the New York Times, argues that the central challenge for poor countries "is not that sweatshops exploit too many people, but that they don't exploit enough." In Cambodia, unlike California, sweatshop jobs aren't the bottom of the totem pole, and many people dream of having working for a regularly paying job one day. In California, the alternative to minimum wage jobs is eliminating low-level menial jobs.

One viable way that small to medium-sized employers may cope with the hike is to make do with less. Not accounting for other variables, a $2 increase on an $8 minimum wage involves laying off one-fifth of minimum wage employees to retain the same profits. This would hurt many of California's most vulnerable workers. Throughout the recession, a link unemployment and number of suicides, homicides, and amount of alcohol abuse has shown to be true.

The way to solve this quality of life problem for the working poor isn't by pitting regulatory agencies against the state's job makers.