Minimum Wage Increase: Bad Medicine for a Recovering Economy

Increases in large metropolitan cities are not comparable to the regional economy that is growing in Sacramento

Back Commentary Sep 2, 2015 By Peter Tateishi

Trends in politics take hold as quickly as those in fashion, and minimum wage increases are definitely “in” this political season. But unlike in the past when Capitol Hill and state legislatures served as battlegrounds for minimum wage debates, cities are now the epicenter. Buoyed by increases enacted in a handful of megacities, including raises to $15 per hour in Seattle, San Francisco and Los Angeles, American municipalities of all sizes have started asking whether they should follow suit, and if so, to what degree. The city of Sacramento is in the thick of exploring this issue via a task force convened by Mayor Johnson aimed at exploring income inequality.

This makes sense politically. Minimum wage increases give the impression that we’ve fixed a problem when, in truth, we’re placing a Band-Aid over a wound that requires surgical attention. We are in the midst of a slow but promising recovery that has seen improved unemployment numbers, increased property values and an uptick in construction projects. But this growth hasn’t been coupled with increased consumer spending; instead, people are slowly using additional income to pay off debt and replenish diminished savings.

The question we should be answering is how to foster continued job creation during our region’s economic recovery.

The Sacramento Metro Chamber and organizations like the Greater Sacramento Area Economic Council are committed to creating, retaining, growing and recruiting businesses to our region. In this year alone, the Metro Chamber’s partnership with the Capital Region Small Business Development Center has resulted in opening 16 new businesses, infusing over $4 million in capital to small businesses, creating and retaining over 100 jobs and counseling nearly 400 local entrepreneurs. The growth of these types of businesses supports a stronger economy with better paying jobs.

This approach is the sustainable way to foster an economy that provides upward mobility for those earning lower wages and creates new, higher-paying jobs above minimum wage. Unfortunately, some opt for the short-sighted, unsustainable approach of quickly raising the minimum wage, which ultimately hurts the economic health of Sacramento and doesn’t pull low-wage earners out of poverty.

Ahead of Mayor Johnson’s task force, the Metro Chamber (representing 1,700 businesses in the region, including more than 550 in the city of Sacramento) reviewed a wide range of economic analyses and listened closely to our members, 91 percent of whom say a minimum wage increase will negatively affect their business. A handful of repeated community concerns also came to the fore, including:

  • a decrease in purchasing power for lower-income individuals
  • limiting access to the workforce for low-skill and young workers
  • placing Sacramento at a competitive disadvantage against our neighboring jurisdictions
  • hurting the long-term economic strength of the recovering economy.

Additionally, examining impacts from other cities and economic studies offers insights that we need to explore thoroughly. Stanford University professor Thomas MaCurdy found our last national minimum wage increase acted as a tax because it led to increased prices on goods generally produced by minimum-wage workers, meaning consumers had to pay more for those goods. Business owners in nearby Oakland and San Francisco have already implemented creative cost structures to bridge the gap.

The same reality is true for individuals on fixed incomes. Senior citizens who receive fixed social security retirement income, for example, will consequentially have reduced purchasing power since the cost of their groceries will increase without any proportionate increase to their income.

Furthermore, some minimum wage earners will almost certainly experience a loss of public benefits. At $15 per hour, a minimum wage earner could be at risk of losing eligibility for MediCal, the National School Lunch Program, and Section 8 Program vouchers. The dollar amount lost with these public benefits would outweigh the marginal increase to their hourly minimum wage, which is why anecdotal evidence from Seattle is emerging of employees requesting fewer hours in order to maintain the social benefits they are used to.

Sacramento has unique strengths that make it a wonderful place to live and work, and that includes a relatively low cost of living. The state minimum wage increases to $10 per hour on Jan. 1, 2016. When that happens, someone earning the minimum wage here would need to earn $14.50 per hour to have the same quality of living in San Francisco. It makes no sense to pin ourselves against our more expensive neighbors that don’t compare to our cost of living.

Finally, increases in large metropolitan cities like San Francisco and Los Angeles are not comparable to the regional economy that is growing, expanding and working here in Sacramento. If a business can simply move 200 feet from one side of Howe Avenue to the other or across the river in order to reduce labor costs, the city of Sacramento will become the best business recruitment tool for West Sacramento, Davis and Roseville.

The solution to the problem is not just arbitrarily raising wages on entry-level jobs but rather creating opportunities for mobility in the workforce. Research demonstrates that two-thirds of minimum wage employees earn salary increases within a year of work.  Minimum wage jobs are intended to be entry level and offer access into the workforce for individuals looking to gain the experience and skills needed to build their portfolio and become marketable for higher-paying jobs. While a minimum wage increase may be a part of the solution to bridging income inequality, we should be focused steadfastly on job creation to ensure that next-tier job is available for a worker to climb.

A steep minimum wage increase right now would have serious negative consequences on the health of the Sacramento economy while at the same time do very little to lift low-wage earners out of poverty.

We should focus on developing our workforce and supporting small businesses so they can create sustainable, upward economic opportunities and financially compete for talented labor. The only sustainable way to lift people from poverty is by creating mobility through education, training and economic growth. Rather than focus on one possible solution, let’s use all the tools necessary to collectively develop a plan for prosperity. The Sacramento region is relying on us to get this right and keep Sacramento working.