Contributors
Lance T. Izumi - Contributor
[Courtesty of Pacific Research Institute]

Lance Izumi is Director of Education Studies for the Pacific Research Institute and
Senior Fellow in California Studies. He is a leading expert in education policy and the author of several major PRI studies. [go to Izumi index]

A New Tax on Business
The proposed minimum wage hike is a bad idea…
[Lance T. Izumi] 8/3/04

The state legislature is on the verge of passing AB 2832, by Assemblywoman Sally Lieber (D-San Jose), that would raise California’s minimum wage from the current $6.75 an hour to $7.75 by January 2006. Although the bill intends to help low-wage employees, it will end up hurting some of those very workers and be a taxing blow to many cash-strapped businesses.

A government-mandated hike in the minimum wage makes the cost of labor more expensive. Employers operating on a thin profit margin will often try to offset their higher labor costs by using fewer low-skilled, low-wage workers. David Neumark, an economist at the Public Policy Institute of California and an expert on the minimum wage, says that raising the minimum wage “acts as a tax on the use of low-skilled workers, discouraging employers from hiring them.” Studies by economists at the Federal Reserve Bank, Cornell University, and many other institutions confirm that raising the minimum wage results in job losses among some low-skill workers.

Take a hypothetical example of a small company with 20 minimum-wage workers. Under the proposed minimum-wage increase, that company will pay out an extra $40,000 in salaries. If it couldn’t afford the higher wages, and given that a full-time minimum-wage employee earns $13,500 per year, the company would have to lay off three employees to keep its labor costs even.

To be fair, those minimum-wage workers who don’t lose their jobs will receive the benefit of a higher wage. Yet, even here the impact of that benefit is complicated. Those favoring a minimum-wage hike often argue that it’s impossible for a single-parent head of household to make ends meet on the current minimum wage. That’s no doubt true. However, only 19 percent of minimum-wage workers are single parents or the sole breadwinner in a couple with children. The other 81 percent are living with their parents or a relative, are part of a two-income couple with or without kids, or are single or married without children. Indeed, raising the minimum wage often benefits those who aren’t poor.

One-third of minimum-wage workers live in families who are in the upper half of the income distribution. In the restaurant industry, many waiters and waitresses earn the minimum wage but they also receive, on average, $20 an hour in tips. During legislative debate, Assemblyman John Laird (D-Santa Cruz) observed that by forcing restaurants to increase the pay of waiters and waitresses, there’s often little money for pay raises for non-tipped backroom staff like cooks, who are paid just above the minimum wage and who don’t receive lucrative tips.

Overall, the proposed hike would cost California businesses $2 billion, which would wipe out a good chunk of the $3.4 billion in workers’ compensation savings negotiated by the governor and the legislature earlier this year. Further, that $2 billion only includes higher wage costs and doesn’t take into account that when payroll costs increase so do health-care premiums, other benefits, and employment-related taxes.

Raising the state’s minimum wage would make a bad business situation worse. A California Business Roundtable study already finds that California has the worst business climate among the 50 states. With the state economy still ailing, lawmakers should be helping companies and entrepreneurs prosper rather than thinking up more ways to put them out of business. CRO

copyright 2004 Pacific Research Institute