Debating the Impact of California’s New Minimum Wage

Comparing Washington at $16.28 to Texas’s, $7.25 (the U.S. minimum), we’ve got a whopping minimum wage disparity:

But still, economists cannot agree on the impact of a minimum wage hike.

Some Minimum Wage History

Our story starts during the 1910s when state legislators were most concerned with women and children. But by the 1930s, the Congress recognized it too should be fighting poverty and passed the Fair Labor Standards Act of 1938. Applying to just half of the work force, it declared industry specific minimums that would gradually rise, Then, between 1961 and 1977, an ascending minimum spread to most of the work force. Meanwhile, on the state level, Massachusetts had the first minimum wage in 1912 and Oregon, the second one, in 1913.

The one constant was the debate. One group believed the minimum wage boosted spending and productivity. Others fought it saying jobs would be lost, there were other ways to help the poor, and no one could identify an optimal minimum wage. Then, adding to the opposition, Ronald Reagan was the first president to oppose minimum wage hikes. Even the NY Times said in January 1987 that “The Right Minimum Wage was $0.00.” Instead, they supported alternatives like the Earned Income Tax Credit. At the time, economic research increasingly displayed that the minimum wage created job losses.

But no one is sure if it does.

The debate continues with California.

California’s Minimum Wage Hike

Starting yesterday, April 1st, California’s fast food workers can be paid no less than a new $20 minimum wage. According to the California FAQ page, their fast-food worker wage hike applies to restaurants with limited service that are a part of a chain with at least 60 establishments.

The Debate

Questioning the landmark Card Krueger 1990s study that said a minimum wage increase even created jobs, economists have said that data came from a problematic telephone survey. Then, more recently, in one 2022 paper, economists disagreed with past studies that concluded there was little impact on employment from a minimum wage rise when comparing neighboring communities. Instead, looking at multi-county commuting zones, they found the restaurant industry’s “robust negative relationship between minimum wage and employment.”

Meanwhile, in another recent paper, an NBER researcher stepped away from the wage/employment connection. Including changes in the skill mix of employees, health benefits, and safety, he looked at an array of alternative responses to minimum wage hikes. Somewhat similarly, in a past econlife post, we saw McDonald’s charge more for a Big Mac after a wage increase.

Now, in a WSJ opinion column, UCLA Irvine economist David Neumark continues the debate. Citing flawed past studies, he reminds us of the Card Krueger study and the importance of using commuting zones rather than contiguous communities. Then, moving onward to eliminating poverty, he disagrees with research that says the higher minimum wage reduces poverty. Saying that most fast-food workers are not poor, he tells readers that, because “a very large share” of people in poor families do not work, the higher minimum wage will have little impact on their income. But most precisely, he calculates that a 10 percent increase in the minimum wage decreases employment by 2 percent.

And finally, in its new paper, the CBO concludes, “In general, increasing the federal minimum wage would raise the earnings and family income of most low-wage workers and thus lift some families out of poverty—but doing so would cause other low-wage workers to become jobless, and their family income would fall.”

Our Bottom Line: The Floor Debate

Our baseline, though, is always the traditional price floor graph. It, most fundamentally, is what the whole debate is about:

Focusing on whether there really are the jobs shortages displayed by the floor, we can choose our side in the minimum wage battle.

My sources and more: Among the countless articles on the minimum wage impact, I suggest several. For starters, I checked California’s minimum wage FAQs and then this WSJ opinion column. A handy complement, at econlife, we looked at California’s cost-of-living. However, for the estimated overall impact of minimum wage hikes, this CBO report was ideal. And, adding to our questions, the Winter 2021 issue of The Journal of Economic Perspectives focused on the minimum wage debate as did this 2022 paper.

Please note that several sections in today’s post came from a previous econlife on the minimum wage.