This commentary originally appeared in Forbes on April 4, 2016.
In response to powerful government union demands, California Gov. Jerry Brown is expected to sign Senate Bill 3 today, a measure hiking California’s minimum wage 50 percent in six years from $10-per-hour to $15. For a third of the state, about 13 million people, this new experiment in central planning will devastate already weak local economies.
California’s cost-of-living index stood at 134.3% of the national average in 2015, meaning that, compared to the rest of the nation, rent, food and services taken together cost about 34% more. Most of this higher cost is driven by the state’s myriad regulations, fees and arcane permits required before building homes, office buildings or manufacturing facilities. By comparison, Texas, the second most populous state, had a cost of living index of 92.6 last year. On average, California is 45% more expensive than Texas.
Just as the Golden State’s cost-of-living was the third-highest among the states, behind Hawaii and New York, there are large cost of living variations within California itself. Housing, goods and services in San Francisco, the emblematic progressive city, are 58% costlier than in the greater Stockton metro area, 84 miles to the east, where the official unemployment rate is 9.5%. The City by the Bay is an astounding 65 to 74% more expensive than is Bakersfield.
Down south on the border with Mexico, idyllic San Diego has a price premium of 36% on Bakersfield and 29% on Stockton. The Los Angeles metro region will set your budget back 31% more than would living in Bakersfield and 25% more than would Stockton.
When California’s minimum wage hits $15-an-hour in 2022, the effect will be extremely uneven across regions. In San Francisco, where the minimum wage is already $12.25, $15-an-hour would buy an equivalent of $8.15 in goods and services nationally—about 12% more than the federal minimum wage of $7.25, once the cost-of-living is considered. But in Bakersfield, that same $15-an-hour would be worth $14.15 at the national level, when adjusted for average U.S. cost-of-living, or, about 95% higher than today’s federal minimum wage.
Regional price differences are one very large factor undermining the wisdom of using central planning to direct the economy. An entry-level worker in Bakersfield likely won’t produce about 70% more value than his counterpart in San Francisco, yet, the cost-of-living adjusted hourly wage assumes just that, demanding that relatively low-cost inland areas pay the same for their labor as the high-cost coast.
As disruptive as a minimum wage designed by coastal elites will be on the 13 million Californians who live inland, the effect on California’s overall economy may be even greater.
Austin is Texas’ most-expensive metro area, inflated by that liberal city’s mounting restrictions on construction and zoning. But, the city sometimes called the “San Francisco of Texas” is still a relative bargain compared to its California counterpart, with San Francisco’s cost of living some 84% higher than Austin’s. The average apartment rents for $1,073 in Austin vs. three times higher in San Francisco, $3,230.
California small businesses, already under siege by a complex web of state and local rules that set them back about $134,000 per year in compliance costs, will now see the price of entry-level labor rise 50% without a corresponding increase in productivity to pay for the greater costs. Some small businesses will adapt by spending more to automate while hiring workers with greater skills. But, for many others, $15-an-hour will be the final California barrier to small business that drove them out of state or simply forced them to close their doors.
If the effect of hiking the minimum wage by 50% will be so disruptive, why did the California Legislature vote for it? One reason: California’s nearly-omnipotent government employee unions. Boosting the minimum wage to $15-an-hour will have a ripple effect on public employee costs for at the state, local and school district level, with everyone from janitors to teachers seeing a big pay hike, all courtesy of the harried California taxpayer.
The California Department of Finance estimates that the higher minimum wage will cost state government $3.6 billion per year more. This is a 3% increase to the state’s general fund budget, most of which will go to pay unionized in-home healthcare workers—largely people paid to care for their own elderly relatives to keep them out of government-run rest homes (though the rapidly growing program is rife with abuse).
But this estimate doesn’t count higher wages for 295,000 California public school teachers. Since new teachers’ pay is tied to double the minimum wage, a 50% increase in the minimum wage will trigger demands for proportional wage increases on up the pay scale. California teachers earn an average of $71,396, not including generous retirement benefits. A systematic pay increase tied to the minimum wage will hit taxpayers for another $6 to $10 billion per year, as much as a 14% jump over the $76.6 billion California presently spends on K-12 education.
The bottom line is this: Ignore the rhetoric about $15-an-hour being for working Californians—it’s all about government unions flexing their muscles to squeeze more from the taxpayer. The only problem being that the government which pays the unions will eventually run out of other people’s money.
Chuck DeVore is Vice President of National Initiatives at the Texas Public Policy Foundation. He was a California Assemblyman and is a Lt. Colonel in the U.S. Army Retired Reserve.