Tag Archives: San Diego

A $15 minimum wage will excessively harm California’s poorest counties

Lawmakers in California are thinking about increasing the state minimum wage to $15 per hour by 2022. If it occurs it will be the latest in a series of increases in the minimum wage across the country, both at the city and state level.

Increases in the minimum wage make it difficult for low-skill workers to find employment since the mandated wage is often higher than the value many of these workers can provide to their employers. Companies won’t stay in business long if they are forced to pay a worker $15 per hour who only produces $12 worth of goods and services per hour. Statewide increases may harm the job prospects of low-skill workers more than citywide increases since they aren’t adjusted to local labor market conditions.

California is a huge state, covering nearly 164,000 square miles, and contains 58 counties and 482 municipalities. Each of these counties and cities has their own local labor market that is based on local conditions. A statewide minimum wage ignores these local conditions and imposes the same mandated price floor on employers and workers across the state. In areas with low wages in general, a $15 minimum wage may affect nearly every worker, while in areas with high wages the adverse effects of a $15 minimum wage will be moderated. As explained in the NY Times:

“San Francisco and San Jose, both high-wage cities that have benefited from the tech boom, are likely to weather the increase without so much as a ripple. The negative consequences of the minimum wage increase in Los Angeles and San Diego — large cities where wages are lower — are likely to be more pronounced, though they could remain modest on balance.

But in lower-wage, inland cities like Bakersfield and Fresno, the effects could play out in much less predictable ways. That’s because the rise of the minimum wage to $15 over the next six years would push the wage floor much closer to the expected pay for a worker in the middle of the wage scale, affecting a much higher proportion of employees and employers there than in high-wage cities.”

To put some numbers to this idea, I used BLS weekly wage data from Dec. of 2014 to create a ratio for each of California’s counties that consists of the weekly wage of a $15 per hour job (40 x $15 = $600) divided by the average weekly wage of each county. The three counties with the lowest ratio and the three counties with the highest ratio are in the table below, with the ratio depicted as a percentage in the 4th column.

CA county weekly min wage ratio

The counties with the lowest ratios are San Mateo, Santa Clara, and San Francisco County. These are all high-wage counties located on the coast and contain the cities of San Jose and San Francisco. As an example, a $600 weekly wage is equal to 27.7% of the average weekly wage in San Mateo County.

The three counties with the highest ratios are Trinity, Lake, and Mariposa County. These are more rural counties that are located inland. Trinity and Lake are north of San Francisco while Mariposa County is located to the east of San Francisco. In Mariposa County, a $600 weekly wage would be equal to 92.6% of the avg. weekly wage in that county as Dec. 2014. The data shown in the table reveal the vastly different local labor market conditions that exist in California.

The price of non-tradeable goods like restaurant meals, haircuts, automotive repair, etc. are largely based on local land and labor costs and the willingness to pay of the local population. For example, a nice restaurant in San Francisco can charge $95 for a steak because the residents of San Francisco have a high willingness to pay for such meals as a result of their high incomes.

Selling a luxury product like a high-quality steak also makes it relatively easier to absorb a cost increase that comes from a higher minimum wage; restaurant workers are already making relatively more in wealthier areas and passing along the cost increase in the form of higher prices will have a small effect on sales if consumers of steak aren’t very sensitive to price.

But in Mariposa County, where the avg. weekly wage is only $648, a restaurant would have a hard time attracting customers if they charged similar prices. A diner in Mariposa County that sells hamburgers is probably not paying its workers much more than the minimum wage, so an increase to $15 per hour is going to drastically affect the owner’s costs. Additionally, consumers of hamburgers may be more price-sensitive than consumers of steak, making it more difficult to pass along cost increases.

Yet despite these differences, both the 5-star steakhouse in San Francisco and the mom-and-pop diner in Mariposa County are going to be bound by the same minimum wage if California passes this law.

In the table below I calculate what the minimum wage would have to be in San Mateo, Santa Clara, and San Francisco County to be on par with a $15 minimum in Mariposa County.

CA comparable min wage

If the minimum wage was 92.6% of the average wage in San Mateo it would be equal to $50.14. Using the ratio from a more developed but still lower-wage area – Kern County, where Bakersfield is located – the minimum wage would need to be $37.20 in San Mateo. Does anyone really believe that a $50 or $37 minimum wage in San Mateo wouldn’t cause a drastic decline in employment or a large increase in prices in that county?

If California’s lawmakers insist on implementing a minimum wage increase they should adjust it so that it doesn’t disproportionately affect workers in poorer, rural areas. But of course this is unlikely to happen; I doubt that the voters of San Mateo, Santa Clara, and San Francisco County will be as accepting of a $37 + minimum wage as they are of a $15 minimum wage that won’t directly affect many of them.

A minimum wage of any amount is going to harm some workers by preventing them from getting a job. But a minimum wage that ignores local labor market conditions will cause relatively more damage in poorer areas that are already struggling, and policy makers who ignore this reality are excessively harming the workers in these areas.

Intergovernmental grant to gelato maker distorts market competition

Intergovernmental grants are grants that are given to one level of government by another e.g. federal to state/local or state to local. In addition to being used on public works and services they also subsidize the development of private goods. The Community Development Block Grant Program (CDBG) is a federally funded grant program that distributes grants and subsidized loans to local and state governments which then use them or award them to other businesses and non-profits. The grants can be used on a variety of projects. Since 1975 the CDBG program has given over $143 billion ($215 billion adjusted for inflation) to state and local governments. The graph below (click to enlarge) shows the total dollars by year adjusted for inflation (2009 dollars) and the number of entitlement grantees by year. While the total amount of funding has declined over time, it was still $2.8 billion in 2014.

cdbg dollars, grantees

Intergovernmental grant programs like CDBG are based on the incorrect idea that moving money around produces economic development and creates a net-positive amount of jobs. But only productive entrepreneurs who create value for consumers can create jobs. The CDBG program and others like it distort the entrepreneurial process and within-industry competition by giving an artificial advantage to the companies that receive grants. This results in more workers and capital flowing into the grant-receiving business rather than their unsubsidized competitors. For example, Brunswick, ME is giving a $350,000 CDBG to Gelato Fiasco to help the company buy new equipment. Meanwhile, nearby competitors Bohemian Coffeehouse, Little Dog Coffee Shop, and Dairy Queen are not receiving any grant money. Governments at all levels, such as Brunswick’s, should not pick winners and losers via a grant process that ultimately favors some constituents over others.

Some other projects that the CDBG program has helped fund are: a soybean processing plant in Arkansas, a new facility for a farmer’s market in Oregon, solar panels for houses in San Diego, and waterfront housing in Burlington, VT. Like the Gelato Fiasco example, these are all examples of private goods, not public, and the production of such goods is best left to the market. If private investors who are subject to market forces are unwilling to produce a private good then it is probably not a worthwhile venture, as the lack of private investment implies that the expected cost exceeds the expected revenue. Private investors and entrepreneurs want to make a profit and the profit incentive promotes wise investments. Governments don’t confront the same profit incentive and this often leads to wasteful spending.

At its best, a government can create the conditions that encourage economic development and job creation: the enforcement of private property rights, a court system to adjudicate disputes, a police force to maintain law and order, and perhaps some basic infrastructure. The scope of a local government should be limited to these tasks.

Want to Help the Earth? Move Back to Metropolis

Ed Glaeser writes in City Journal on his latest study, which suggests that cities emit less carbon than suburbs. (Full NBER paper with Matthew Kahn can be found here.) The top five cities (by emissions) are in California.

This sounds counterintuitive at first blush. But, Glaeser suggests, people who live in the suburbs drive more and consume more housing. The policy implication is make cities more affordable by loosening building restrictions:

If climate change is the major environmental challenge that we face, the state should actively encourage new construction, rather than push it toward other areas. True, increasing development in California might increase per-household carbon emissions within the state if the new development, following the current model, took place on the extreme edges of urban areas. A better path would be to ease restrictions in the urban cores of San Francisco, San Jose, Los Angeles, and San Diego. More building there would reduce average commute lengths and improve per-capita emissions. Higher densities could also justify more investment in new, low-emissions energy plants.

Similarly, limiting the height or growth of New York City skyscrapers incurs environmental costs. Building more apartments in Gotham will not only make the city more affordable; it will also reduce global warming.

Here’s Glaeser’s write-up at the New York Times Economix blog. Here’s Tyler Cowen on a previous, related study.