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L.A.'s minimum wage plan doesn't make sense

L.A.'s minimum wage plan won't help the poor or alleviate poverty, economic firm reports

Confronting unyielding poverty rates and economic inequality, Los Angeles city and county political leaders are debating whether hiking the minimum wage is a good idea. My firm, Beacon Economics, analyzed the effects of a jump from the current $9 state minimum wage to $13.25 within the city by 2017 as proposed by Los Angeles Mayor Eric Garcetti.

Our report was underwritten by the Los Angeles Area Chamber of Commerce, which will certainly lead some to accuse us of acting as a mouthpiece for the profit-minded business community. But that's not the case. Lifting families out of poverty ultimately helps everyone — including business owners. The focus of this debate should be on whether higher minimum wage is an efficient way of achieving this laudable goal.

It is true that many of the working poor here have low-paying jobs. But this does not by extension mean that all workers earning less than $13.25 an hour are among the city's or county's poorest households. In fact, half of such workers live in households where total earnings are above $55,000 per year — the county's median income. They may be teenagers working part-time jobs, or servers or salespeople who earn much more in commissions or tips.

A citywide minimum wage isn't targeted well enough to have much of an effect. Many working poor Angelenos hold jobs outside the city limits, and they wouldn't see any benefits from a higher minimum wage. Similarly, half of those who would get a wage hike don't live within the city of Los Angeles. While the latter are indeed among the working poor, helping them should be the purview of their local government, not L.A.'s.

How does this all add up? Under the city's current proposal, less than one dollar out of every four would end up in low-income households in the city of Los Angeles. No matter how you look at it, that's a low rate of return.

That might not matter if the economic costs were small. But they aren't. Food service firms will see their base costs rise 8% to 12% as a portion of total revenues, as will social assistance firms (5% to 7%) and retail operations (3% to 5%). These firms will have no choice but to raise prices and reduce the size of their workforce to stay in business.

These problems are magnified because local businesses will have competitors in cities not subject to the new minimum wage. More than one-third of businesses in Los Angeles are within two miles of the city's border. Companies considering opening or expanding business in the region will, over time, settle where labor costs are lower.

If other parts of the county also raised their minimum wage, that might mitigate a portion of the damage. But unincorporated areas of Los Angeles County and a handful of cities still represent only a small fraction of the broader regional economy.

Our model doesn't suggest that, on net, Los Angeles will lose jobs if the minimum wage goes up, but rather that job growth here will take a substantial hit. That would be a blow to a region still trying to climb out of the fiscal hole formed during the Great Recession.

Other researchers looking at the mayor's proposal suggest that somehow a minimum wage increase will grow the Los Angeles economy. This flies in the face of logic. At its core, an increase in the minimum wage is a transfer of wealth from one group (employers and their customers) to another (workers with hourly pay below a certain level). Such transfers may be fair, even socially desirable, but they do not increase the size of the economic pie. When it comes to raising the minimum wage, economists debate the magnitude of the negative impact, but there is no generally accepted literature suggesting such moves ever measurably increase economic activity.

Los Angeles' working poor do need help, and our political leaders should explore ways to assist them directly and alleviate poverty. But the current minimum wage proposal won't accomplish that. The benefits are far too diffuse and the costs to economic growth are far too high.

Christopher Thornberg is an economist and founding partner of Beacon Economics.

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