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THE UNPREDICTABLE IMPLICATIONS OF CALIFORNIA’S MINIMUM WAGE INCREASE AND WHAT IT MEANS FOR YOUR BUSINESS

August 22, 2016

By 2023, California’s minimum wage will reach $15.00 an hour, making it the highest minimum wage in the country.[1] While the benefits and burdens of this increase are mostly speculative, the empirical examples of wage increases in West Coast cities may illuminate an otherwise murky future for small businesses.

Like California, Seattle has also implemented a staggered minimum wage increase whereby large companies will start paying their employees $15.00 next year, and smaller businesses will gradually follow suit by 2021. Remarkably, this year, the city has increased its minimum wage from around $9.50 to $11.00. Despite grave predictions by economists and politicians alike, a University of Washington study found that over the year, Seattle’s job rate growth has tripled, business failure rates have not increased, and the city’s lowest paid workers have seen a significant increase in wages.[2] However, Seattle’s wage increases have not been fully realized due to the staggered increase system. Therefore, while initial data is optimistic, it is simply too soon for business owners to breathe a collective sigh of relief.

Further compounding the trepidations of business owners are the negative testimonials from the Los Angeles garment industry. American Apparel, the largest clothing manufacturer in Los Angeles, has already considered outsourcing the manufacturing of some garments and/or moving manufacturing plants due to the minimum wage increases in Los Angeles; it is feared that many other garment manufacturers will follow its lead.[3] However, most hoteliers in Los Angeles have not levied layoffs in anticipation of the wage increases, despite similar negative speculations by small business owners.[4] Therefore, a move by American Apparel appears to solely serve as a proactive business decision based on possibility rather than fact.

While the empirical examples in the past year may relieve the small business owner, the burden may ultimately fall on the consumer in the form of price increases. Studies over the past twenty-five years demonstrated that price increases have been the go-to remedy for businesses to recoup losses for wage increases.[5]  However, a study by the University of Leicester found that these price increases were proportionally insubstantial compared to the minimum wage increase.[6] Furthermore, the University of Washington study found little evidence that price increases were associated with the minimum wage increase in Seattle.

So, as a small business owner what does the wage increase mean for you? Unfortunately, there is little guidance other than anecdotal examples over the past year and speculative studies. Still, the small business owner may want to look proactively – by making prudent hiring decisions, increasing prices, and conducting internal audits – rather than adopting a “wait and see” approach. However, if you decide to opt for the latter approach, Seattle shows us there may be no reason to panic – yet.

By Robert Prine, Law Clerk

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