Statement on California’s Minimum Wage AB 10 by Sylvia A. Allegretto

Sylvia A. Allegretto, PhD
Economist
Institute for Research on Labor & Employment
University of California, Berkeley
allegretto@berkeley.edu  (510) 643-7080

Good afternoon.  The minimum wage (MW) has been one of the most studied and debated topics in economics. Central to the debate on the MW is whether increases cause a decline in employment for effected groups such as teenagers and/or workers in effected industries such as the restaurant industry. The literature goes back decades and it has been mixed—but there was a consensus that small dis-employment effects did result from increases in the MW increases.

And for anyone who suffered through econ 101 or just common sense really would think this outcome confirms economic theory: an increase in the price of something (labor) leads to a decrease in demand (workers). Keep in mind this assumes much and in reality labor markets are more complex.

However, a new and growing body of cutting edge research on MWs builds upon and expands theory and methods that measure such effects. Much of this research, including my own with Dr’s Dube & Reich published this month in a peer reviewed top economics journal—first illustrates how and explains why the old consensus estimates were incorrect. In sum, the employment trends and patterns across the country and over time are correlated with the patterns of MW changes particular at the state level—thus we are able to show that negative effects found in past studies were spurious.

We then build upon the methods to better account for these spatial and varying trends of MWs and employment. We conclude and our estimates show that increases in MWs do not result in employment declines.

There is a theory behind our finding that has been forwarded regarding MW workers for quite some time—Monopsony—in short the wages paid to our lowest paid workers are below what would be a competitive wage (supply & demand theory mentioned above). Which is one reason why increasing the MW does not lead to a decline in employment.

Moreover, there are many positive effects of MW increases:

  • A strong wage effect—so it matters to the economic wellbeing of workers
  • Reduced turnover & quit rates—thus reduces the high cost of TO
  • Better worker morale and productivity

Two last points:

The proposed increase is not an increase at all—it is mostly just keeping up with price increases (see Figure below). It has been four years since the last increase in the MW in California—thus the proposed increase will, by and large, only return the buying power to the level it was at 4 years ago.

Finally, the timing for an increase in California’s minimum wage could not be better with our economy essentially stuck in neutral and an unemployment rate that has been in double digits for over two years now (1.5 year about 12%) and expected to remain high into the foreseeable future.  The economy suffers from a lack of demand thus increasing buying power of our lowest wage workers would be beneficial to the overall economy.

Based on research by economists at the Federal Reserve Bank of Chicago (2008) an increase in California’s minimum wage will not cost jobs, but will help families of minimum wage workers make ends meet and will strengthen the economy by providing a crucial stimulus precisely when the economy needs it the most.  The bottom line is that the economic case for this wage increase, at this time, is more than compelling.  

California’s minimum wage has helped to keep wage floor from falling.