Why California’s risky experiment with a $15 an hour minimum wage will likely backfire, Part I

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By Mark J. Perry

CAMinWageCalifornia lawmakers signed legislation last week to raise the state’s minimum wage by 50%, from the current level of $10 an hour (the highest current state minimum wage in the US, along with Massachusetts) to $15 an hour over the next six years. That historic minimum wage hike to $15 an hour (see chart above for a long-term perspective on the state’s inflation-adjusted minimum wage over an 85-year period from 1938 to 2020) follows similar legislation in San Francisco and Los Angeles, where those cities’ minimum wages are already scheduled to rise to $15 an hour by 2018 in San Francisco and by 2020 in Los Angeles. Is this unprecedented experiment that will distort California labor markets with a 50% government-mandated increase in labor costs for some workers really a good idea based on economic fundamentals? I think not, and to make it more readable, I’ll present four different reasons in four separate blog posts explaining why a uniform, statewide $15 an hour minimum wage in the Golden State will likely backfire. Here’s Part I, the first reason:

1. California’s Already Business Unfriendly Climate Will Now Deteriorate Even Further. In every year over at least the last decade, Chief Executive Magazine has ranked California as the worst state in the country to do business, based on an annual survey of 650 chief executives on state business climates that includes ratings for each state’s level of taxation, burden of regulation, workforce quality, and living environment. The most recent state rankings are available here for 2015, which include these two CEO comments about the Not-So-Golden State’s business climate:

CEO 1: California is the highest-taxed state in the nation, highest gas tax, 60-plus cents per gallon, which—combined with California Air Resources Board regulations—makes delivery within the state extremely costly. Added to this is the disdain for any and all manufacturing as Sacramento wants this to be a Green State. Add to that a pension debt that is largely ignored but very real.

CEO 2: California is a deeply troubled state with a problematic infrastructure and social issues. Businesses in the state are so highly regulated that most cannot afford to do business and elected officials do not have any business experience/understanding.

Separately, a recent study by the Tax Foundation on state business tax climates ranked California No. 48 as one of the worst states in 2016 for its overall business tax burden, which included a ranking of No. 50 for the category “Individual Income Tax” burden. This is the fourth consecutive year that the Tax Foundation ranked California as the third worst US state for business tax climate, just barely ahead of New York and New Jersey.

Bottom Line: California is already known as the US state most hostile and unfriendly to businesses and job creation, thanks to its onerous tax and regulatory burdens. Now that California is imposing the highest state-level minimum wage burden (and the highest minimum wage in state history, see chart above) on companies who hire unskilled and limited-experience workers, it will make the Golden State an even less attractive location for business. The inevitable result will likely be more companies leaving the state, fewer companies moving operations into the state, fewer existing companies expanding their businesses in the state, and reduced overall economic growth and fewer job opportunities. California can’t go any lower in the CEO state rankings, but being known as the state with the highest taxes, most burdensome regulations, and now the state with the highest labor costs for minimum wage workers will surely seal the Not-So-Golden State’s reputation as the worst state in the country to do business.

Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan’s Flint campus.

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