California laggin’: As Golden State minimum wage rises, so does unemployment

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California has been a pioneer in raising the minimum wage for decades, consistently putting its state-wide minimum well above the federal rate. Over that same period, the Golden State has lagged behind the rest of the nation in creating jobs, consistently posting higher unemployment rates than the rest of the nation. Funny how these things work out.

We’re about to get more evidence of how much raising minimum wages affects employment rates now that California is phasing in a $20 minimum wage for fast food restaurants. It takes effect April 1. The early results suggest raising the wage destroys jobs.

As recently as 2006, California’s minimum wage was just $6.75 an hour, compared with the then-federal minimum rate of $5.15 an hour. The California rate rose to $7.50 in 2007 and $8 an hour the year after that. The California rate moved roughly in tandem with the federal rate, which rose to $7.25 an hour by 2009 and has remained at that level ever since.

None of these were living wages even then, but ideally the minimum wage isn’t supposed to be one. It’s an entry-level wage for people’s first jobs. The stereotype of a minimum wage earner being a teenager who still lives at home and flips burgers at a fast food joint didn’t emerge from a vacuum.

California legislators didn’t see it that way and, starting in 2014, began regularly hiking the state minimum wage on the theory that this would turn the minimum into a “living wage.” The California rate rose to $9 an hour in 2014 and has had an increase at least every other year ever since then. The main state-wide rate is now $16 with a special $20 rate directed at fast food stores kicking in now.

Over that same two-decade period, California’s unemployment rate has consistently averaged 1.5 points above the national rate. There were other complicating factors during that time frame: The US economy went into a recession in 2008 and unemployment rate spiked in 2020-21 thanks to the COVID-19 pandemic. But the rest of the nation was affected by those things too. No matter what else has happened with the broader economy, California has always had a larger percentage of jobless people than the rest of the nation.

The Wall Street Journal reported recently that Golden State restaurants are cutting jobs in anticipation of hike, with pizza delivery restaurants alone cutting nearly 13,000 jobs as they dump delivery duties on to app-based delivery business. How can the app-based businesses do it? They employ drivers as contractors, which exempts them minimum wage laws.

California did attempt to force the app-based business to treat their drivers as full-time employees, passing the AB5 law in 2019 which would have, among other things, required all employers to pay the statewide minimum wage. California voters objected to the law when they discovered that it threatened to drive the app-based businesses out of the state entirely.

Voters passed Proposition 22 the following year, exempting app-based business from the law. Prop 22 didn’t repeal the law entirely however, leaving the non-app-based businesses at a competitive disadvantage.

The upshot of this being that raising the minimum wage to $20 an hour for fast food restaurants has made it impossible for many to retain all of their workers. The delivery folks have been among the first to go. Many businesses simply cannot afford the higher labor costs. Forcing employers to hire less is just one of the myriad negative economic effects of raising the minimum wage, notes my CEI colleague Ryan Young.

“It pains me to think about shutting down stores or laying people off,” Alexander Johnson, owner of 10 California restaurants including Auntie Anne and Cinnabon locations, told the Wall Street Journal. “I love California, and I’m very sad about what’s going on.”