\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2024\/04\/GettyImages-1706878991-e1712345790284.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
California implemented its $20 minimum wage law for fast-food workers on Monday, bumping pay up to 25% from the state\u2019s $16 minimum. Impacting over 500,000 workers in the state, the mandate was heralded as a success for labor organizers<\/a>\u2014but businesses are fearing<\/a> they\u2019ll have to lay off workers or hike up prices to offset increased operation costs<\/a>.<\/p>\n Libertarian economist Scott Sumner, a California resident, believes the new mandate could hobble the economy beyond just the state\u2019s cost of doing business\u2014it could make the state\u2019s unemployment rate higher for the long term.<\/p>\n \u201cIf California has more rules that increase costs for businesses\u2014maybe mandating worker benefits or regulations that just make it more costly to do business in California\u2014that could slightly increase the natural rate of unemployment,\u201d Sumner told Fortune<\/em>.<\/p>\n The \u201cnatural rate of unemployment\u201d refers to an economic concept that is often confusing to normal people, to wit: Even an economy at full employment<\/a> includes a small number of unemployed workers, often new entrants to the workforce or people switching from one job to another. It\u2019s \u201cthe rate at which the unemployment rate settles when the economy itself is relatively stable,\u201d as Sumner put it.<\/p>\n Classic economic theory holds that the natural rate of unemployment<\/a> is related to wages, and that, as wages go up, businesses trying to keep their profit margins may cut employees\u2019 hours or lay them off. Higher wages in theory also means that businesses are going to have a higher bar for their workers. After all, if they\u2019re paying more money, Sumner argued, they should be getting their money\u2019s worth.<\/p>\n \u201cThere would be quite a few workers who simply would not be profitable to be hired at $40 an hour,\u201d Sumner speculated. \u201cAnd so there are obvious limits to what you can do in terms of artificially raising wages.\u201d<\/p>\n With employers more protective of the jobs they offer, the workforce becomes more competitive, Sumner said. Workers once drawn to California\u2019s generous worker protections may find themselves with fewer job opportunities.<\/p>\n Certainly, economists disagree vigorously about the effects of raising the minimum wage, and many studies of municipalities that have raised their minimums have found no negative effect on employment. A recent Congressional Budget Office review<\/a> on raising the federal minimum to $15 an hour concluded that there was considerable \u201cuncertainty\u201d about its effect on unemployment, and that the raise was equally likely to have zero effect as to put 2.7 million workers out of a job.<\/p>\n Whatever the effects, those tidal shifts are far away, and the impact of California\u2019s $20 minimum wage mandate is just a drop in the bucket, Sumner said: \u201cWhat we\u2019re really talking about is a relatively low national unemployment rate, and a modestly higher rate in California, not dramatically higher.\u201d<\/p>\n But California is significant because of its sheer size, Sumner noted: It makes up about one-eighth of the U.S. population and also has the country\u2019s highest unemployment rate of 5.3%<\/a>, pushed up by layoffs from tech companies that overhired during the pandemic. It\u2019s also a hotbed of labor organizing and has wages that skew higher to accommodate its higher cost of living. While one wage mandate is unlikely to make big waves, it represents a growing movement that could make a bigger splash.<\/p>\n Just one week before the state passed its $20 minimum wage law for fast-food workers, members of Southern California\u2019s Unite Here Local 11 for hospitality workers celebrated the ratification of a contract<\/a> that would impact employees at 34 hotels, raising wages by $10 per hour for room attendants, cooks, and other non-tipped workers, representing a nearly 50% increase over three years. By 2027, most room attendants will make $35 hourly, and cooks will make about $41.<\/p>\n \u201cWe have won a life-changing contract that transforms hotel jobs from low-wage service work to middle-class professional positions,\u201d Kurt Petersen, co-president of the union, said at a downtown Los Angeles rally after the contract ratification.<\/p>\n Workers coming off of months of striking cited the area\u2019s steep cost of living and strenuous workload<\/a> as reasons necessitating a wage boost.\u00a0<\/p>\n But Sumner, again calling up classical economics, said those wages are likely above equilibrium for hospitality workers, proving attractive to those looking for work, but unsustainable for creating new jobs in the sector.<\/p>\n \u201cIt seems to me it\u2019s high enough where it might draw some people in from other states seeking those jobs,\u201d Sumner said. \u201cAnd then if they can\u2019t all find the jobs they want, you get some increase in the natural rate of unemployment within California.\u201d<\/p>\n Movements like these, when happening in tandem, can have a lasting impact on a larger scale, Sumner said, not only increasing unemployment rates, but also changing patterns in where people live and find jobs.<\/p>\n To be sure, Americans\u2019 rate of moving for work\u2014or any reason\u2014has been on a slow decline for decades, hitting a record low<\/a> last year. But if anything could shake up this long-term stasis, it could be the national divergence in pay, as more and more states, and even cities, hike their minimum wage<\/a>, which has stayed flat at the federal level for a record 17 years.<\/p>\n Lately, California has turned from a destination for workers to a place to leave, as many state residents have looked elsewhere, especially in Texas, where there are more jobs and ample housing opportunities<\/a> that are more affordable than California\u2019s. Just look at Elon Musk, who moved SpaceX<\/a> and Tesla<\/a> operations to the Lone Star State to skirt capital gains taxes<\/a>, and is now the biggest employer in Austin<\/a>.<\/p>\n The move isn\u2019t just appealing to billionaires, Sumner posited. Plentiful jobs in Texas could in the future appeal to those in California who thought they were striking gold in high-wage jobs, but were really striking out in finding a job at all.<\/p>\n \u201cI do think these effects are worth watching,\u201d he said.<\/p>\n<\/div>\n\nA shifting tide<\/strong><\/h2>\n
Subscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n