Implications of California's Minimum Wage Law on Low-Income Neighborhoods
Implications of California's Minimum Wage Law on Low-Income Neighborhoods
Understanding the Basics of the Minimum Wage Law
California's minimum wage law, which sets the rate at twenty dollars per hour, is designed to improve the financial situation of the state's working poor. However, the economic implications of such laws are more complex than they initially appear. While it is generally accepted that such laws could lead to increased unemployment if the minimum wage surpasses the market wage, this doesn't capture the full picture. The reality is that the labor market is not homogeneous, and different market participants will react differently to changes in wage rates.
Market Participants and Their Roles
In his book Man, Economy, and State, Murray Rothbard categorizes market participants into submarginal, marginal, and supramarginal groups. Submarginal buyers leave a market when the price exceeds their ability to pay, while marginal and supramarginal buyers remain. Supramarginal buyers are more willing or financially able to absorb price increases than marginal buyers. Similarly, submarginal sellers leave a market when the price is below their reservation price, while marginal and supramarginal sellers remain. Supramarginal sellers have cost advantages due to their incumbency or economies of scale.
The Impact of the Minimum Wage Law on the Fast-Food Industry
In the fast-food industry, large, low-cost firms are typically supramarginal buyers, capable of replacing labor with automation and benefiting from access to low-cost credit. Small, high-cost employers operating on tight margins are marginal buyers. Submarginal buyers include recently shuttered businesses or entrepreneurs on the verge of opening their first location. Supramarginal sellers are workers whose reservation wages are significantly less than the market wage, while marginal sellers are those whose reservation wage is just below the market wage. Submarginal sellers are those who are not participating in the labor market because the market wage is below their reservation wages.
The Unintended Consequences of the Minimum Wage Law
California's twenty dollar minimum wage, which applies only to fast-food restaurants with more than sixty locations, has negative effects on poor communities, no impact on workers in high-income communities, and actually benefits large, low-cost employers. In affluent areas like Huntington Beach, the new minimum wage is roughly equal to the market wage paid to fast-food workers. However, in poorer areas like Oakland, the market wage is lower than the minimum wage. This discrepancy can lead to increased unemployment in poor communities as high-cost firms exit the market and more workers enter the labor market in search of higher wages.
The Impact on Entrepreneurs and Small Businesses
Entrepreneurs who have built restaurant chains in poor communities, paying the prevailing rate of fourteen dollars per hour, face significant challenges as a result of the new minimum wage. Their labor costs increase by approximately 43 percent, and they may not be able to raise prices due to limited purchasing power in these neighborhoods. As a result, they may have to compromise on quality or rely more heavily on automation, which may not be feasible due to high interest rates and limited support from major banks. If these measures are not enough, they may have to close locations to reduce their size to below the sixty-location threshold, limiting their ability to expand into wealthier neighborhoods.
The Winners and Losers of the Minimum Wage Law
The unintended costs of this legislation will fall on residents of low-income California neighborhoods, who will face reduced job opportunities, higher unemployment, fewer dining options, and limited business growth. Meanwhile, life in wealthier neighborhoods will largely remain unchanged. The main beneficiaries of the law will be established, low-cost, highly automated firms like McDonald's, which will face less competition in the future.