Chain Reactions From Higher Wage

Recently the California Industrial Welfare Commission voted to raise the minimum wage by 90 cents, from $3.35 to $4.25 an hour. For covered workers it will have a significant effect, allowing many of them to rise above the poverty level. While the increase has been hailed as a significant victory for various community groups, the effect on the California business community has been somewhat ignored.

The major imponderable of the new minimum wage is the potential effect that it will have on the wage structure across the board. For example, a worker who currently makes $4 an hour earns a wage that is nearly 20% above the minimum wage. When the new $4.25 minimum takes effect in California in July, that same worker will fall below the minimum wage. What will that worker’s response be? If the wage is merely brought up to the new minimum wage, he or she will receive an increase but the job status will have suffered, since it will become a mere minimum-wage job.

Will the worker demand a wage level of $4.80 in order to maintain his position in relation to the minimum wage? Of more importance, what will be the response of organized labor? Will negotiators for labor, helping to set wages for large groups of workers, attempt to maintain the pay ratio that they had with the old minimum wage? If so, we could witness a new burst of wage inflation followed by a burst of price inflation. If unions insist that such wage ratios be continued, the economic effect could be considerable.

How minor or how major the economic effect will be depends on the type of business involved. Firms can be classified in three categories: a company that exports, a company that competes with imports, or a company that does not export and whose product does not compete with imports. For example, a restaurant or real-estate broker would not be competing with imports, but a Chevrolet or Ford dealer would be. A parking-lot operator would not be competing with imports, while a textile manufacturer would be.

A company that exports or a firm that competes with imports will find that some of the benefits of the lower dollar exchange rates will be lost by the higher costs of labor. But this effect should be minimal, since very few export-oriented or import-competing firms employ labor at the minimum wage. In fact, because these types of firms often require a unionized and semi-skilled labor force, it is difficult to find workers for less than $5 per hour.

The largest number of jobs affected by the minimum wage are in industries that do not compete with imports--the food and personal-service industries. Workers who receive a substantial chunk of their income from tips have been excluded from the general minimum-wage increase, and instead will receive $3.50 per hour. From the current minimum of $3.35, that is less than a 5% increase--about equal to the inflation rate of the past year. The employer should not complain, since this will be the first increase in nearly eight years.

What about the hourly-wage workers who do not receive income from tips and who thus would be entitled to the full increase? Employers of those workers will see their costs rise by at least 25%--about the size of the minimum-wage increase.

Minimum-wage workers typically spend all of their income on food, shelter and clothing. The new wage level may permit discretionary spending by these workers. Some fast-food restaurants, supermarkets and other places may see their business actually expand.

Some businesses might use the higher wages as a reason to slow their hiring. Because of the increase in the minimum wage, employees’ Social Security contributions will increase, and by law employer contributions will also have to increase.

What will most likely occur is that these firms will re-define jobs so that a worker may perform more tasks or will be required to be more flexible in work assignments. In most cases this will increase efficiency, and may be enough to offset the increased minimum wage.