California business owners are in for some heartache.
Sources close to Gov. Jerry Brown are reporting to the media that a tentative deal has been reached to raise the state’s minimum wage to $15.00 an hour by 2023.
This is supposedly an effort by politicians to keep the measure off of the ballot in 2016 and avoid an ugly political fight.
California would be wise to reconsider how the minimum wage, like any other price control on any other commodity, hampers market efficiency.
A perennial issue for academics, the minimum wage has a cornucopia of studies and experiments showing every conceivable effect a policy could have.
Advocates point to this or that study showing negligible effects on employment while opponents point to studies debunking those or other analyses purporting to show artificially raising wages does indeed cause greater unemployment.
Because of this, both sides seem willing and able to yell their positions until they resemble tomatoes.
For that reason, I find thought experiments immensely far more satisfying than quantitative debates over minimum wage.
Consider the types of businesses that typically employ minimum wage labor: retail, fast food, unskilled services, etc.
These are low-margin, volume-based industries with intense competition sell products that are fairly similar.
This means the primary means of competition for these businesses is price. This is a near-perfect competition, a theoretical market structure.
For a lawn care company, I do not care who cuts and mulches my lawn, as long as it gets done.
The value to customers is derived primarily from being cheaper than the other options.
Since this is labor that does not require lots of skill, other individuals and businesses are able to enter the market quickly and with little capital, whatever a few mowers and a truck costs.
If you are racking up big profits due to a lack of competition, you can expect more people to start businesses and eat into your profits very soon.
This brings us back to wages. You may want to pay your employees more, but you cannot, because then your prices would be uncompetitive.
Even massive companies that make large profits due to economies of scale and sheer volume cannot raise wages.
They need returns sizable enough to justify the amounts of capital investors have risked to start and run their operations.
There’s risk in business. If I can divest and make as much or more money with the same or less risk, I will.
These workers face a similar dynamic.
Since there are, by definition, few barriers to stop someone from seeking employment in low-skilled labor, worker wages do not rise dramatically.
If they did, millions of people without better options would quit their current jobs and get their applications in.
The lack of skill needed for these jobs is the very thing that keeps their wages low, but it is also why we must make sure there is always incentive for businesses to offer these jobs.
These are jobs of last resort. Except this commodity is people in vulnerable positions who need their jobs desperately.
zaochamb@indiana.edu
