Gus Carlson is a U.S.-based columnist for The Globe and Mail.
As cautionary tales go, the minimum wage mess in California is a compelling one for lawmakers anywhere who seek to tinker with free market forces to make political hay and succeed only in hurting the very constituents they hope to benefit.
The California situation is a textbook example of how not to go about things. Last September, Governor Gavin Newsom raised the minimum wage for the 500,000 workers in the state’s quick-service restaurant sector by almost 25 per cent, to US$20 an hour. The law, which came into effect in April, applies to any chain with 60 or more restaurants nationwide, among them well-known names such as McDonald’s, Burger King and California’s own In-N-Out Burger.
The domino effect of the backlash has been swift and sharp. Since the new law was announced, more than 10,000 QSR jobs in the state have been eliminated. More cuts are planned this year, including almost 1,300 drivers at chains such as Pizza Hut and Round Table Pizza.
Many restaurants also raised prices, which dampened consumer demand. Few people want to pay US$20 for a hamburger meal – that is the antithesis of the fast-food concept of convenience at a wallet-friendly price point.
As a result of softer sales, many locations have cut back hours for employees. So, even though workers are making a higher wage, those who survived layoffs are often logging fewer hours, and the net gain of the new law is muted.
Further, and more potentially devastating to work force numbers, the wage hike has added new impetus to the sector’s push to automation. New technology companies such as Navia Robotics and Nuwa Robotics have emerged in the artificial intelligence and robotics space to develop systems that will accelerate the evolution of fast-food restaurants to automation and away from human staff.
That doesn’t bode well for people. As automation becomes the rule not the exception, the prospect of more job losses is very real.
To be sure, the concept of a minimum wage has merit in its intent to protect low-paid workers by providing an enforceable baseline value for their labour. The problem comes when legislation such as California’s is applied selectively and punitively to drive a political agenda.
While politics are certainly at play in the California scenario – Mr. Newsom, a progressive Democrat, has a notoriously anti-business agenda – it is a two-way street. Lawmakers on the other side of the ideological aisle who seek to depress minimum wages unfairly are equally culpable. Georgia and Wyoming, for example, both have Republican governors and state minimum wage rates below the federal rate.
Like anything, the minimum wage equation is about balance. That’s why it is so challenging for legislators around the world to settle on appropriate rates.
Most industrialized countries have minimum wage structures – some are broad and all-encompassing; others are tiered across local, state, provincial and federal levels to reflect the economic differences and disparities of a national landscape.
In the United States, for example, the federal minimum wage is US$7.25 an hour. Currently, 34 states, territories and districts have their own rates, as well. In states that have minimum wage rates in addition to the federal rate, employees are entitled to the higher of the two.
By comparison, Ottawa raised Canada’s federal minimum wage to $17.30 on April 1. Provinces and territories also set minimum wages as part of their labour laws.
Done properly and fairly, despite predictable ideological grumbling on both sides, a minimum wage can be a valuable element of a healthy economy.
Done poorly and unfairly, it can result in something like California’s predicament – massive job losses and higher prices driving consumer unhappiness, resulting in fewer hours for those workers who remain and an acceleration of the shift to automation that will prompt further job losses.
While perhaps politically expedient for its advocates, the new California law has quickly become an economic lose-lose-lose scenario for workers, consumers and employers.
Regardless of your political stand, the point is clear. Lawmakers of any stripe who seek to manipulate free markets without understanding the balance required to keep economic engines chugging along should beware.
Minimum wages have their place in the economic mix, but like any component in the bigger machine, if they get out of whack in terms of size and influence, things will go wrong until balance is restored.
It is unclear if California has the political will to recover from its misstep in the QSR sector. Still, lawmakers everywhere struggling with minimum wage calculations should watch the Golden State carefully and understand the consequences, intended and unintended, of actions that threaten the balance of a free market.
The ultimate litmus test lies in whether any action will do no harm and actually help people it is intended to benefit. California got the answer wrong. But at least it may be a learning moment for anyone else wrestling with this issue.