President Biden addressed the nation during his first State of the Union speech last week. While early parts of the remarks rallied Americans to the cause of Ukraine, the rest sounded like a broken record pushing for stalled, destructive policies. Among them, Mr. Biden called on Congress to raise the federally mandated minimum wage to $15 an hour.
Armed with the facts, a bipartisan contingent in Congress acknowledged that doubling the national one-size-fits-all wage floor doesn’t work. It’s why it failed to pass last year. The cost of living in New York is very different than in South Dakota. And warnings from economists about raising government-mandated wage floors too much too quickly ring true wherever the policy is considered.
Amid four-decade high inflation, businesses cannot pass along labor cost increases to price-sensitive consumers — that is, without a customer reaction. Therefore, the budget gap must be made up by reducing staff hours, cutting back on employees or introducing automation or self-service where possible to replace workers.
Young and inexperienced staff inevitably get hit the hardest. Entry-level job opportunities that act as a stepladder to a larger career are the first to meet the buzz saw. Duties become consolidated or performed by robots. As a UCLA economist noted in 2019, “[e]very time we raise the minimum wage, kids lose their jobs.” The only other options available to owners are closing their businesses or for some, moving to an area with a more business-friendly environment. When Congress debated passing a $15 federal minimum wage, a 2021 report from the Congressional Budget Office found that raising it to $15 an hour by 2025, while it could lift 900,000 people out of poverty, could also lead to 1.4 million lost jobs.
California is a prime example of a state continually moving the government dictated wage floor — harming unskilled workers and businesses in the process.
At the beginning of the year, California implemented a $15 minimum wage for businesses with more than 25 employees. And going forward, it will automatically rise over time to coincide with inflation. But even the smallest of small businesses aren’t immune. Companies with 25 or fewer workers will be subject to the $15 wage floor come 2023.
Think activists in the state are satisfied with this “victory?” Think again. A new ballot initiative would raise California’s minimum wage another 20% to $18 an hour if approved in November. And don’t hold your breath it will stop there. Joe Sanberg is the deep-pocketed liberal who is funding the issue. He has previously advocated for a $25 minimum wage. That’s $50,000 a year for unskilled labor.
Add on high taxes and a burdensome regulatory environment, and the Golden State is an economic Merry-Go-Round from hell. And business owners want off. In 2021, Chief Executive Magazine ranked California as the worst state for business. Similarly, the Small Business Policy Index finds that only New Jersey has a poorer climate for small businesses. Not exactly a pecking order to hang your hat on.
Despite liberal hopes, the resulting exodus from California is not a right-wing conspiracy.
According to an analysis from the Hoover Institution at Stanford University, between 2018 and 2021, more than 260 companies relocated their headquarters from California to another state. During the first half of 2021, the pace of exits more than doubled compared to the monthly average of the previous three years. And that doesn’t take into account businesses that have simply moved employees to other states, or worse, downsized operations or closed altogether.
Among high-profile examples, The Walt Disney Company is relocating 2,000 jobs — but not their headquarters — from California to Florida. California hospitality businesses — which employ many entry-level workers — have felt the tightest squeeze. An examination of pre-pandemic government data shows employment growth at full-service restaurants in the state has slowed to a crawl as the wage floor creeps up. And in local areas that have adopted higher minimum wage levels ahead of statewide mandates, the industry experienced more severe consequences in the years leading up to the pandemic.
For example, San Francisco County — which currently has a minimum wage exceeding $16 an hour — shed more than 1,200 full-service restaurant jobs from 2016 to 2019. The “death march” — as coined by EATER San Francisco to describe a Bay Area restaurant closure period several years ago — has also extended to Alameda County, San Mateo County and Los Angeles County. Restaurants in these locales were also among the hardest hit by the pandemic as they shouldered the heaviest labor cost burden.
Idealistic Democrats have been avoiding common sense and pushing to hike the federal minimum wage to $15. The natural experiment taking place in California is putting the local consequences on full display. Imagine if the policy was implemented in rural Iowa or Alabama. Bill Buckley famously observed, “Idealism is fine, but as it approaches reality, the costs become prohibitive.”
• Richard Berman is president of Berman and Co. in Washington.