California’s new $20 minimum wage could leave the state with higher unemployment for years to come, economist says
California implemented its $20 minimum wage law for fast-food workers on Monday, bumping pay up to 25% from the state’s $16 minimum. Impacting over 500,000 workers in the state, the mandate was heralded as a success for labor organizers—but businesses are fearing they’ll have to lay off workers or hike up prices to offset increased operation costs.
Libertarian economist Scott Sumner, a California resident, believes the new mandate could hobble the economy beyond just the state’s cost of doing business—it could make the state’s unemployment rate higher for the long term.
“If California has more rules that increase costs for businesses—maybe mandating worker benefits or regulations that just make it more costly to do business in California—that could slightly increase the natural rate of unemployment,” Sumner told Fortune.
The “natural rate of unemployment” refers to an economic concept that is often confusing to normal people, to wit: Even an economy at full employment includes a small number of unemployed workers, often new entrants to the workforce or people switching from one job to another. It’s “the rate at which the unemployment rate settles when the economy itself is relatively stable,” as Sumner put it.
Classic economic theory holds that the natural rate of unemployment is related to wages, and that, as wages go up, businesses trying to keep their profit margins may cut employees’ hours or lay them off. Higher wages in theory also means that businesses are going to have a higher bar for their workers. After all, if they’re paying more money, Sumner argued, they should be getting their money’s worth.
“There would be quite a few workers who simply would not be profitable to be hired at $40 an hour,” Sumner speculated. “And so there are obvious limits to what you can do in terms of artificially raising wages.”
With employers more protective of the jobs they offer, the workforce becomes more competitive, Sumner said. Workers once drawn to California’s generous worker protections may find themselves with fewer job opportunities.
Certainly, economists disagree vigorously about the effects of raising the minimum wage, and many studies of municipalities that have raised their minimums have found no negative effect on employment. A recent Congressional Budget Office review on raising the federal minimum to $15 an hour concluded that there was considerable “uncertainty” about its effect on unemployment, and that the raise was equally likely to have zero effect as to put 2.7 million workers out of a job.
Whatever the effects, those tidal shifts are far away, and the impact of California’s $20 minimum wage mandate is just a drop in the bucket, Sumner said: “What we're really talking about is a relatively low national unemployment rate, and a modestly higher rate in California, not dramatically higher.”