Geography, economics and the minimum wage. A scholar explores likely consequences of California’s $15 minimum

Advocates of the $15 minimum wage have decided to target McDonald’s stores today. It’s not likely that many of them will be persuaded by this analysis by California Lutheran University professor Bill Watkins. But anyone involved with the issue will benefit from considering his assessment of how the $15 wage will play out in California. 

Watkins writes,

A $15 an hour wage would devastate some economies, but California is different.  Individuals and families may be devastated.  Regions may be devastated.  Coastal California, with the possible exception of Los Angeles and the far northern counties, will do just fine. 

Not so for other parts of the state, with different economies. He makes a crucial distinction.

California is in transition from a tradable goods and services producing economy to a consumption and non-tradable services producing economy.  Tradable goods and services are goods and services that can be consumed far from where they are produced.  Manufacturing is the classic example of tradable products, but thanks to the internet, services are also increasingly tradable. 

…Non-tradable services are those that must be consumed where they are produced.  Lawn care, haircuts, and home maintenance are some examples.

He explains how the effects of the wage hike will vary by industry.

One impact of California’s minimum-wage increase, then, will be an acceleration of California’s transformation to non-tradable services production and the permanent loss of tradable sector jobs, outside of fields like software.

It is fundamental to economics that the higher the cost of any good or service, the less that will be consumed.  This is the price effect, and it affects tradable producers differently than non-tradable producers.

Most tradable producers will not be able to increase prices, he maintains, because the global marketplace dictates price and demand. (We’re oversimplifying here.) Non-tradable producers will be able to pass along higher labor costs by increasing prices, within reason. But,

Tradable sector and non-tradable sector businesses will attempt to minimize the cost increase of a minimum wage hike.  This is most easily achieved by replacing some labor with capital.  This is the production function effect.

The wage hike, then, gives topspin to what we’re already seeing with automation, restaurant kiosks and tablets, and manufacturing and warehouse robots.

What of the economic benefits of providing workers with more purchasing power?

Some would argue that there is another effect, an income effect.  The idea is that the increased income, and spending of minimum-wage workers will more than offset the price and substitution effects.  This violates another fundamental economic principle, the one that asserts that there are no free lunches.  The minimum wage earner’s new income is not new wealth miraculously provided by the minimum-wage fairy. 

The regional impacts will be dramatically different, he points out, with an example that will also resonate with Washingtonians.

Analysis of price and substitution effects implies that different California regions will be affected differently by the minimum wage increase.

Because wages are generally lower in Central California than in Coastal California, the minimum wage increase will be more impactful in Central California, amplifying both price and substitution effects relative to Coastal California…

Most of California’s wealthy coastal citizens never see California’s poor inland communities.  Yet, wealthy Coastal Californians — particularly from San Francisco — dominate state policy.  They implement policy as if the entire state were as wealthy as the communities they live in. 

We recommend the article. As we’ve written, the issue will be front-and-center this year with at least one minimum wage initiative making the November ballot. The more information available to voters, the better.