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The "Fight for 15" movement got its biggest win yet on Thursday as the California legislature passed a bill to phase in a statewide $15-per-hour minimum wage over the next six years. Gov. Jerry Brown is expected to sign the legislation.
There's a lively debate among economists about the economic impact of minimum wage hikes. Higher minimum wages provide raises to some workers, but some economists argue that they also prompt substantial job losses. Other economists dispute this, saying there's little or no effect on employment and that businesses compensate for higher costs through reduced turnover, improved productivity at work, lower compensation for better-paid workers, and price increases.
So who is right? When I set out to interview economists about the effects of California's minimum wage hike, I was expecting some strong disagreements. Instead, I found a broad consensus: California's hike is so large — and would result in a minimum wage so high — that no one really knows what will happen. None of the three economists I interviewed was willing to make a prediction about how the new law would affect employment in California.
"It would be foolhardy to believe you could project what's going to happen with any degree of confidence," said Jeff Clemens, an economist at the University of California San Diego whose research has found that higher minimum wages have caused job losses in the past. That sentiment was echoed by Arindrajit Dube, whose research has suggested that minimum wage hikes do not cause significant job losses.
Of course, that in itself is a reason to be concerned, since California lawmakers are taking a risk with the livelihood of millions of low-wage California workers. But advocates of the California proposal argue that it's a risk worth taking.
The economic impacts of minimum wage hikes is hotly debated
Companies employ workers if the value they get from the workers' labor exceeds the costs of employing them. The higher the minimum wage is, the harder it will be for employers to afford to pay workers. So if the minimum wage gets too high, job losses are inevitable.
But economic theory doesn't tell us how high a minimum wage has to get before significant job losses occur. And over the past quarter-century, this has become one of the most hotly debated questions in economics. A famous 1993 study examined the effects of a minimum wage hike in New Jersey by comparing employment in nearby counties in New Jersey and neighboring Pennsylvania. Surprisingly, the authors of that study, David Card and Alan B. Krueger, found that employment at New Jersey restaurants affected by the wage hike actually increased faster than employment at nearby restaurants in Pennsylvania, where the minimum wage did not increase.
Of course, that was only one study. Over the next two decades, many other economists have performed similar studies, with varying results. For example, a recent study by Clemens found that the most recent hike in the federal minimum wage — from $5.15 in 2006 to $7.25 in 2009 — "reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points." On the other side, a comprehensive study of state-level minimum wage hikes between 1990 and 2006 by Dube and two co-authors found "no detectable employment losses from the kind of minimum wage increases we have seen in the United States."
We have no experience with California-size minimum wage hikes
Unfortunately, little if any of that past research is directly applicable to California's proposal, which would take the state's minimum wage to unprecedented highs. California's current $10-per-hour minimum wage is already among the highest in the country — only Washington, DC, has a higher minimum wage at $10.50 per hour. California is planning to boost its minimum wage by another 50 percent over six years. Even after adjusting for inflation, the new rate of $15 per hour could be the highest minimum wage ever adopted by a US state.
Raising the minimum wage to $15 an hour by 2022 "will likely mean that 30 to 40 percent of the California workforce will get a raise," Dube said in a phone interview. "This will be a big experiment. It's far outside of our evidence base."
I asked Dube — generally seen as a supporter of a higher minimum wage — if it was a mistake for a state as large as California to try such a big increase. Would it be better to let $15-an-hour experiments in San Francisco and Los Angeles play out?
"If you're risk-averse, this would not be the scale at which to try things," Dube told me. "On the other hand, if you think that wages are really low and they've been low for a really long time and we can afford to take some risks, doing things at this scale will get us more evidence."
"A $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences," wrote Alan Krueger, who has served as an economic adviser in the Obama administration, last October. Krueger supports raising the national minimum to $12 per hour, and he acknowledged that some cities and states might be able to absorb a $15-per-hour minimum wage. But he argued that a $15 minimum is "beyond international experience, and could well be counterproductive."
Clemens said one reason it's hard to predict the effects of California's wage hike is that it will affect different types of workers than previous hikes. In his previous work, Clemens studied the federal wage hike from $5.15 to $7.25 between 2006 and 2009. This increase affected a relatively small number of workers at the very bottom of the wage scale.
In contrast, the California wage hike will affect workers making between $10 and $15 per hour. Clemens said that "the types of workers, the amount of experience they have, the length of time they've been in their particular employment relationship" are all different in this higher income bracket. So a $15-per-hour minimum wage might have significantly different economic impacts than a $10 minimum wage.
It's also significant that the new minimum would take effect statewide, not just in wealthy cities like San Francisco and Los Angeles. Dube points out that — for better or worse — the law will have the biggest effect in less affluent areas like Fresno, where average wages are lower. More workers in those areas will get raises, but there's also a greater danger that businesses will be forced to lay off workers.
Conservatives point to Puerto Rico as a cautionary tale
Experts told me there's no direct analogue to California's wage hike, but one of the closest parallels is Puerto Rico in the early 1980s. The standard of living in Puerto Rico is significantly lower than on the US mainland, and so until the 1970s Congress allowed the island to set its own, lower minimum wage on an industry-by-industry basis. But in 1974, Congress changed that, phasing in the higher US minimum over a decade. By 1983, Puerto Rico had the same $3.35 minimum wage that applied throughout the continental US. And because Puerto Rico is poorer than the mainland, the higher minimum affected a lot of workers.
"Puerto Rico experienced massive job losses as a result of the application of the U.S. minimum to the island," wrote Alida J. Castillo-Freeman and Richard B. Freeman in a widely cited 1992 study of the minimum wage hike. "Imposing the U.S.-level minimum reduced total island employment by 8 to 10 percent compared to the level that would have prevailed had the minimum been the same proportion of average wages as in the United States."
The researchers found that the higher minimum wage forced many low-skilled workers to flee to the United States in search of work — something they could easily do because there are no restrictions on migration between the island and the mainland. Before the higher minimum wage took effect, people leaving Puerto Rico tended to be more educated than those who stayed. Afterward, migrants became predominantly less well-educated, suggesting that the higher minimum may have forced the least skilled workers to leave the island in search of work.
Yet some economists question whether the Puerto Rico experience is really the cautionary tale that conservatives portray. A follow-up study by Alan Krueger examined the same data with different statistical tools and found no sign that the higher minimum wage had reduced employment in Puerto Rico.
Moreover, Puerto Rico was in a very different economic condition in 1980 than California is today. Puerto Rico was one of the poorest parts of the United States and saw its minimum wage increased from a very low level to a level typical of the United States as a whole. In contrast, California is one of the wealthier parts of the US and already has one of the nation's highest minimum wages. So the economic consequences of its new, even higher minimum wage could be very different.
The debate probably won't be settled anytime soon
Surprisingly, Richard Freeman, the co-author of the original Puerto Rico study, doesn't see the island's experience as a cautionary tale for California. "A big jump in the minimum wage did cost some jobs" in Puerto Rico, he told me, "but it was not a giant disaster at all."
Freeman argues that California's higher minimum wage might be worth it even if it costs some people their jobs.
"If the minimum wage goes up 50 percent and you lose 5 percent of work, there are huge benefits flowing to lots of people," he says.
Freeman likes a provision of the California proposal that would allow the governor to halt the increases in the event of an economic downturn. "You want to raise the minimum as much as possible to benefit people and obviously stop when we're causing some serious harm," Freeman says.
The tricky thing, however, is that it may not be easy to tell if California's higher minimum wage is harming employment.
"A lot of people were saying that if some of these increases are implemented, we'll finally 'get an answer' to the question" of how big minimum wage increases affect employment, Clemens told me. But he's skeptical about this. Because the new minimum is going to be phased in over six years — and possibly longer — it could be hard to draw any firm conclusions about the law's effects, even after the data is in.
After all, people are still arguing about the effects of minimum wage hikes that occurred in the 1980s, 1990s, and 2000s. We can expect that California's experience will be studied intensively over the next decade. But there's no guarantee a consensus will be reached on its economic effects.
