Capitol Alert

Fact check: No consensus that minimum wage raises boost unemployment

California senators celebrate historic minimum wage vote

All 26 Democrats in the Senate voted in favor of Senate Bill 3, which raises the California minimum wage to $15 an hour by 2022.
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All 26 Democrats in the Senate voted in favor of Senate Bill 3, which raises the California minimum wage to $15 an hour by 2022.

A deal to raise California’s minimum wage to $15 an hour has drawn opposition from Republicans and business groups, who argue it will force employers to cut workers in an effort to save on labor costs. They warned of economic fallout during a Wednesday hearing and Thursday’s floor debate.

The statement: “Almost invariably, the effect (of raising the minimum wage) is a rise in unemployment,” Assemblyman Jay Obernolte, R-Big Bear Lake, said during the Assembly Appropriations Committee hearing.

Analysis: There is no clear evidence that raising the wage “almost invariably” drives up unemployment. The record is mixed.

Obernolte’s office pointed to a 2006 paper by two economists for the National Bureau of Economic Research. After reviewing a range of research on the minimum wage in the United States and abroad, the authors found “a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages,” though they acknowledged “a lack of consensus” about a potential link.

Factors like the economy’s overall strength and other policies at work complicate the picture, so “it’s probably not the case that unemployment always rises following a minimum wage increase,” William Wascher, a Federal Reserve economist and one of the authors, wrote in an email. But he still concluded that “all else equal, an increase in the minimum wage tends to lower employment.”

The body of research on the minimum wage is voluminous and other researchers have drawn different conclusions, including a number finding little or no effect of wage increases on employment rates. An oft-cited study of fast food restaurants in New Jersey and Pennsylvania, conducted by two Princeton University economists – one subsequently was elected to the American Academy of Arts and Sciences and the other later chaired President Barack Obama’s Council of Economic Advisers – found no employment decrease when New Jersey raised its wage in 1992.

A Legislative Analyst’s Office analysis of a $15-an-hour California ballot initiative offers some insight. The effects would be complex, the LAO said, and “entire industries could contract, expand, or adopt different business practices.” It predicts the higher wage would push more workers into the labor pool and cause businesses to raise prices or use fewer low-wage workers.

A report from the nonpartisan Congressional Budget Office estimated that bumping the federal wage from $7.25 to $10.10 would eliminate about 500,000 jobs while augmenting the earnings of “many more” low-wage workers.

Still, those are only predictions. Data on wage rates and unemployment since the 2006 study cited by Obernolte paint an ambiguous picture.

After the federal minimum wage rose to $5.85 in July 2007, the national unemployment rate held steady over the next few months. As the federal minimum wage jumped again, to $6.55 in July 2008 and then to its current level of $7.25 in July 2009, the unemployment rate rose drastically.

But that soaring unemployment rate paralleled the housing market’s collapse, which plunged the nation into recession. Because unemployment rates reflect “the underlying strength of the economy,” according to Stephen Levy, director of the Center For Continuing Study of the California Economy, it makes more sense to try and tease out the minimum wage’s consequences when the economy is healthy.

Since Seattle first started raising its minimum wage en route to $15 an hour, the unemployment rate in the Seattle area has fluctuated. It sat at 4.3 percent in April 2015, when the first pay raise kicked in, dropped to 3.6 percent in September, and rose to 5 percent in February 2016. While Obernolte cited the Seattle example as a cautionary tale, some economists say it is too early to draw firm conclusions.

California has lifted its minimum wage twice since 2014, from $8 an hour to its current level of $10 an hour, as the state and national economies have strengthened. When the California rate rose to $9 in July 2014, the state unemployment rate was 7.4 percent. It dropped in each subsequent month of that year, finishing the year at 6.9 percent. When the minimum wage ascended to $10 in January 2016, 5.7 percent of Californians were unemployed; in February, that rate fell to 5.5 percent.

There’s a price to be paid for raising the minimum wage. At one local Mexican food chain, it’s 14 cents a taco.

Jeremy B. White: 916-326-5543, @CapitolAlert

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