Fulfilling a five-year plan to bring up minimum wage leads to mixed feelings among California’s employers and employees
It’s been a year since California first raised the bar (and the income) for minimum wage employees. It’s part of a five-year plan to take California’s minimum wage workers from $10 an hour up to $15. But California isn’t the only state taking strides to improve their overall economy by raising wages for their lowest-paid employees.
Twenty-one states and several cities bumped up their minimum wage in 2017, though only Arizona, New York, California, Seattle, and Washington D.C. have made plans to reach $15 an hour for all minimum wage employees. Some places, like Pittsburgh, Pennsylvania, only raised the minimum wage to $15 per hour for city workers.
Each is doing it a little differently. In New York City, where fast-food workers were making just $8.75 an hour in 2015, the plan is to hit $15 by 2018. Other parts of the state expect to hit $15 an hour by 2021. Seattle, in comparison, is ahead of the curve, where some large employers have been required to pay a $15 minimum wage since the start of 2017 (small employers who pay toward their employees’ medical benefits won’t reach $15 an hour until 2021).
In an attempt to give businesses the chance to balance their books and figure out how to accommodate the new wage hike, California’s plan is to increase the minimum wage by $1 each year until 2022 (though some cities, like Los Angeles and Emeryville, have plans to increase wages more rapidly). Now that the first year’s increase is over, we’re looking back to see how that plan is playing out so far.
Increased wages put stress on small businesses
Earlier this year, we wrote a blog about how increased pay boosts employee morale, and the fact that better wages make for happier employees still stands. But not everyone experiences an increase in happiness when the requirement for minimum wage goes up. Small business owners, especially, tend to struggle, particularly in the food industry where margins are smaller.
One big problem for restaurants who serve lower-income clientele is raising menu prices to offset payroll costs isn’t a viable option for staying in business. One such small business owner is Monica May, chef and co-owner of Nickel Diner, located in downtown Los Angeles. Her primary customers include public servants, families that travel from poor neighborhoods, police, and the homeless.
In a July 2017 article by the “Los Angeles Times,” May and her business partner, Kristen Trattner, explained how they’re stuck between a rock and a hard place. “I like who I feed and as soon as I raise the prices, I change my clientele,” Trattner told the publication.
Raising prices isn’t the only option restaurants and other small businesses have for making up the difference in payroll. Many, like Pann’s (also in Los Angeles), have decided to cut their hours, closing their doors at times when they see fewer customers.
In a recent blog by LAist, Pann’s owner, Jim Poulos, confirmed the increase in minimum wage, and the coming increases, have been tough on his bottom line. Having to increase pay not only for minimum-wage employees but for everyone else so all workers feel valued and fairly compensated, is one issue. What’s more, because his vendors are also having to increase their payroll, the costs of goods have gone up too. “It’s been a huge hit,” said Poulos.
Customers have more money to spend
The flip side of higher payroll costs is workers have more money to spend, which, in some ways, has actually given a boost to the restaurant industry. One business that has benefited is Wetzel’s Pretzels.
In a January 2017 interview with KQED, franchise owner Mike Jacobs explained how the increase in minimum wage has bolstered his sales. “My overall sales were something like 15 percent ahead after the first minimum-wage bump, and now they’re about 12 percent ahead this year. It isn’t because I’m such a great manager or smart guy, but the buying public has more money in their pocket.”
Even Wetzel’s Pretzels CEO Bill Phelps can’t find fault with the increase to minimum wage. “I was concerned about it a couple of years ago when California started raising the minimum wage,’” he says, but now, “I’m shocked by the business.’”
One way to tell if customers are spending more on meals out is to look at the Consumer Price Index. According to the “Monthly (by Expenditure Detail): from 2000” report, urban consumers from Los Angeles spent more and more each month from January 2017 through October 2017, eating out at restaurants. Urban customers are defined as “the majority of the population,” including “professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban-wage earners and clerical workers.”
In fact, under customer spending on “food away from home,” customers have spent 4.4 percent above last year’s number. San Francisco showed similar results, sitting at 2.1 percent growth.
It’s worth noting people aren’t just spending more on eating out — they’re also spending less on home-cooked meals. In the category “eating at home,” numbers were down to -.6 percent for Los Angeles and -2.0 percent for San Francisco.
While these spending trends are the result of numerous contributors, one likely factor is the increase in wages, giving customers more money to spend. And given they’re choosing to spend that money eating out rather than at home, it’s probably safe to say overall, most consumers don’t mind the increase in menu prices made by restaurants to offset payroll increases.
Will Seattle’s numbers spell out California’s future?
California isn’t alone in its journey toward increased pay for minimum wage workers. As previously mentioned, some of Seattle’s employers have already started paying a $15 minimum wage. It’s no surprise, then, that some analysts have already started looking into the numbers so far. Unfortunately, the results haven’t been as positive as hoped.
The study, conducted by researchers at the University of Washington, found that jobs and hours for minimum-wage workers decreased more in Seattle than in surrounding areas where the minimum wage did not increase. People earning less than $19 per hour actually saw a 9 percent decrease in hours from 2014 to 2016, while nearby low-wage earners saw a 7 percent drop.
According to a June 2017 “Los Angeles Times” article, some analysts believe this decline in hours and jobs could have more to do with Seattle’s booming job market than the increased minimum wage. UC Berkeley economist Emmanuel Saez believes Seattle’s drop in unemployment could be forcing employers to pass out raises across the board. It is worth noting, while jobs and hours went down for the lowest-paid workers, Seattle restaurants actually hired more higher-paid hourly employees.
Edward Leamer, an economist at the University of California Los Angeles, paints a more dire picture, saying Los Angeles should be “alarmed.” His perspective is if any city should be handling the increase to minimum wage well, it’s Seattle, where the average hourly wage is $36, compared to Los Angeles’ $28.
Reconciling predictions with actual outcomes
We know what should happen when workers get paid more. People are more productive (check out our minimum wage research for more information). They stay at their jobs longer, and turnover and training costs go down. Better pay means reduced poverty, which, in turn, leads to less reliance on public assistance programs. People feel better, too, when they have a little more money in their pockets. Studies show that infant health and mental health both improve when minimum wage goes up.
But knowing what should happen and even what has happened in the past when minimum wage has increased is only so helpful. Until we see these predictions coming true in the here and now, the debate will continue, as people on both sides of the argument go head to head, wondering if we’re heading down a path of destruction or one of infinite growth.
It’s still too soon to tell for California, and perhaps still for Seattle, so this is one issue you can expect us to keep an eye on as we roll into 2018 with a new set of wage increases and the opportunity to see the ripple effect of these changes.