California celebrates yet another economic blunder but a political boon for Democrats. Indeed, the Newsom administration passed a new legislation increasing the minimum wage to $20 per hour for fast-food workers. From a political standpoint, the Newsom administration just scored an important point to strengthen its grip on power in California. From an economic standpoint, however, this new legislation is another massive disaster that will undermine competition for labor resources, and certainly create unemployment within youth employment.
The new minimum wage legislation, which propelled hourly wages to $20 per hour, appears to be good news for Californian workers in the fast-food industry. From now on, fast-food restaurants will be compelled by law to pay their workers no less than $20 per hour regardless of whether or not the worker is skilled at the job. The rationale given for this wage boost is not economic, however, but moral. The Newsom administration argued that workers must earn a living wage, and the only way for workers to earn a living wage is to increase the minimum wage. Although this explanation sounds certainly honorable from a moral standpoint, economic consequences are not based on moral decisions but on market forces.
Basic economics suggests that when wages are set above market equilibrium, it creates a surplus of available workers in the labor market, meaning that there are more people available to work than what employers could hire. And this surplus creates then unemployment.
The minimum wage mainly affects the youth because they are the ones who seek professional experience. Employers are extremely reluctant to hire unskilled workers because they have to spend time, money, and resources on these unskilled workers to bring them up to speed while having experienced workers enables the company to be more efficient. That money spent on unskilled workers could be used for more productive endeavors that would increase efficiency.
Beyond the classic unemployment paradigm that the minimum wage creates, this legislation will also undermine competition in the fast-food industry. Big fast-food corporations such as McDonald’s or Burger King love the minimum wage law and other types of regulation imposed upon the industry because they have the financial muscle to meet these regulations, a privilege that smaller fast-food restaurants do not have.
It is important to emphasize that workers’ salaries are always based on the revenue generated by the company. If a company struggles to increase its revenue and a minimum wage is imposed, a considerable portion of the company’s cash reserve will be then used to meet workers’ wages, which makes it extremely difficult for the company to be profitable if most of its expenses go into workers’ wages. In addition, regulations are very expensive to maintain, and smaller companies with less capital than corporations will see the bulk of their cash reserve spent on meeting these regulations. When a company struggles financially, the first it does is to reduce its labor force by letting people go.
Politically, however, this new minimum wage legislation is an important political benefit for Gavin Newsom and his administration. The most important thing for Newsom is to garner more votes by continuing to increase his electoral base, and increasing the minimum wage is one of those legislation that guarantees voters support for a particular public policy.
Political decisions are unfortunately not concerned with economic consequences although every political decision made is always contingent on considerable economic consequences. Thus, this new legislation will certainly benefit Gavin Newsom’s political agenda, but it will not improve the welfare of California’s fast-food workers because when the minimum wage increases, everything else increases in parallel, and that’s why the minimum wage never becomes a living wage.