01/07/18

California Business Owners React to the Minimum Wage Increase

On January 1, the California statewide minimum wage increased $0.50. For small businesses with 25 or fewer employees, the minimum wage is now $10.50 an hour. Larger businesses pay $11 an hour. The statewide minimum will be $15 an hour for small businesses by 2023 (2022 for larger businesses), although some cities are implementing minimum wage increases faster.

Conflicting Studies On California Minimum Wage

An Employment Policies Institute (EPI) study analyzed employment trends in California from 1990 through 2017. For industries with the most low-paid employees, the study found each 10% increase in minimum wage reduced employment by almost 5%. For all industries, the findings imply each 10% increase in California’s minimum wage reduced employment by 2% for affected employees.

The authors of the study used the historical data to estimate that increasing the state’s minimum wage to $15 will cause a loss of about 400,000 jobs by 2022.

However, the study’s authors also noted businesses could take actions that don’t decrease employment. Plus, “whether the real-time response of an economy will mitigate or exacerbate the effects of raising the minimum wage is an open question.”

Despite the dire predictions of the EPI study, a study by economists at the University of California, Berkeley found a $15 minimum wage won’t affect the number of jobs. Researchers based the prediction on a new model created to analyze the effects of a $15 minimum wage. The model takes “into account how workers, businesses and consumers are affected and how they respond to this type of mandated wage policy.”

The Small Business Owner’s Perspective

The obvious effect of higher minimum wages on small business is increased payroll costs. A May 2017 Forbes article reported small businesses are struggling with minimum wage increases.

However, small business owners have mixed views about the increases.  A January 2017 survey of 500 small business owners found that 33% see advantages in increases. A March 2017 survey of 700 small business owners found that 47% supported a minimum wage increase.

The January survey stated, “They [small business owners] believe increased wages would actually improve employee retention, or productivity, or both, which would lead to big wins for their bottom line.” Another potential advantage for small businesses is customers have more money to spend.

However, the January survey also found 14% of owners said they would have to let employees go due to a minimum wage increase. Plus, 28% said a higher minimum wage would prevent them from hiring more employees and growing their business.

The effects of a higher minimum wage depend on many variables. For example, a study of restaurants found a $1 increase in minimum wage led to 14% more restaurants with a 3.5-star Yelp rating going out of business but had no effect on 5-star restaurants going out of business.

Each business must deal with the wage increase in its own way. For some, finding ways to cut costs without reducing employee hours may be the answer. Others may have to make harder decisions.

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About the author

Carol Wiley
Carol Wiley started her writing career as a technical writer for Boeing. Since then, she's written blog posts, case studies, white papers, and more for businesses large and small. These days, Carol is a regular contributor to Lendio News. Carol has a B.S. in Aerospace Engineering from University of Virginia and both an MBA in Finance and Certificate of Technical Writing from University of Washington.

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