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Wage & Hour Laws

The Pros and Cons of Raising the Minimum Wage: A Look At California


By Josh Young Jan 31, 2017

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Last November, there was a consensus among American voters that minimum wage levels are too low. While the federal government has kept the national standard at $7.25 since 2009, on January 1, 2017, nineteen states enacted new minimum wages through state regulations. And Oregon, Maryland, and Washington D.C. will realize increases later this year.

The Golden State

Given that California -- which raised its rate to $10.50 this year as part of a march to $15 per hour by 2020 -- maintains the world's sixth largest economy, the state can serve as a helpful microcosm to explore the impact of these minimum wage increases.

Trying to figure out the full impact these new wage laws will have on your business? Read: How Minimum Wage Increases Affect All Employees' Pay.

Proponents claim that these increases will improve the lives of roughly 1.7 million people, empowering some of the state's poorest workers. Further, by raising the lowest possible pay rate, employers will be inclined to bump up experienced staff who are near the new minimum.

Detractors, however, argue that these pay increases place too much strain on employers, discouraging business growth and leading to potential job loss as company-owners look to labor alternatives, such as automation.

Beyond the direct impact to employers, these changes will also influence the daily lives of the state's citizens in both positive and negative ways.

Consumer Products

Pro: Both state and national minimum wage rates have trailed behind productivity and inflation. The Pew Research Center found that the federal minimum wage has lost 9.6 percent of its purchasing power since the last increase in 2009. And the Economic Policy Institute argues that if the minimum wage had kept pace with American production, the hourly rate should now be at $18.85 -- well above California's 2020 target.

Providing workers, particularly those with the least disposable income, with more cash to cover necessities will alleviate financial strains and help lift families out of poverty.

Con: Some cities in California have already seen how higher minimum wage increases can raise the price of common consumer goods. After the city of Oakland, California enacted a 36 percent minimum wage increase, the town saw coffee prices rise from 10 to 20 percent.

Similarly, a study conducted by Purdue University estimates that by raising the minimum wage of fast food employees to $15 per hour, the public can expect a 4.3 percent increase in prices.

Housing

Pro: According to estimates conducted by the National Low Income Housing Coalition, a person earning the California state minimum wage in 2015 would need to work 92 hours each week to afford the rental costs of a one-bedroom apartment. With a higher minimum wage now realized, these workers will be able to more easily afford housing.

Con: In densely populated areas with limited housing available, the wage increase could actually drive higher rental costs that outpace the higher pay. Economist Rosalie Ray argues that in areas where the housing market isn't keeping pace with growth, such as Los Angeles, the wage hike will "increas[e] the buying power without increasing the supply, which will just drive up the prices."

Childcare and Education

Pro: A 2014 study published by UCLA found that by raising the California minimum wage to just $13 per hour, the state could improve the incomes of 7.5 million families. And increased family income tends to improve school performance, while students who live in poverty are more likely to miss school days.

Con: California provides low-income parents with subsidies to cover the high costs of day-care and preschool programs. However, the new 2017 minimum wage means that a couple each working 40 hours per week in a minimum wage position will earn more than the earnings cap for the program.

One mother discussed in a Los Angeles Times article that her daycare costs increased from $167 per month to $2,400 now that her family had to pay the full price. While another parent saw her costs go from $360 to over $1,000 per month.

While the majority of parents who currently use this subsidy will be able to continue into 2017, several will have to make other arrangements, including switching to part-time work and handling childcare themselves.

Conclusion

Whether you feel that minimum wage increases are morally mandated  for the good of society or that they are a well-meaning but misguided strategy, these laws have a major impact on the complex economics of our society and can yield a number of unintended consequences to consumers and to your business.

If you would like to learn more about how Workplace Answers can help you and your management staff adjust to these new realities, fill out a form on the right to schedule a demo of our wage and hour law courses.

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