Why are so many stores closing?
In a pair of affluent coastal California counties, the canary in the mineshaft has gotten splayed, spatchcocked and plated over a bed of unintended consequences, garnished with sprigs of locally sourced economic distortion and non-GMO, “What the heck were they thinking?”
The result of one early experiment in a citywide $15 minimum wage is an ominous sign for the state’s poorer inland counties as the statewide wage floor creeps toward the mark.
Consider San Francisco, an early adopter of the $15 wage. It’s now experiencing a restaurant die-off, minting jobless hash-slingers, cashiers, busboys, scullery engineers and line cooks as they get pink-slipped in increasing numbers. And the wage there hasn’t yet hit $15.
As the East Bay Times reported in January, at least 60 restaurants around the Bay Area had closed since September alone.
A recent study by Michael Luca at Harvard Business School and Dara Lee Luca at Mathematica Policy Research found that every $1 hike in the minimum wage brings a 14 percent increase in the likelihood of a 3.5-star restaurant on Yelp! closing.
Another telltale is San Diego, where voters approved increasing the city’s minimum wage to $11.50 per hour from $10.50, this after the minimum wage was increased from $8 an hour in 2015 – meaning hourly costs have risen 43 percent in two years.
The cost increases have pushed San Diego restaurants to the brink, Stephen Zolezzi, president of the Food and Beverage Association of San Diego County, told the San Diego Business Journal. Watch for the next mass die-off there.
But what of California’s less affluent inland counties? How will they fare?
Christopher Thornberg, director of UC Riverside’s Center for Economic Forecasting and Development, told the San Bernardino Sun that politicians should have adopted a regional approach. He said it would been better to adapt minimum-wage levels to varying economies – something like the Oregon model, the nation’s first multi-tiered minimum-wage strategy.
Oregon’s minimum-wage law is phased, with increases over six years. By 2022, the minimum will be $14.75 an hour in Portland, $13.50 in midsize counties and $12.50 in rural areas.
“That makes sense,” Thornberg told the Sun. “That’s logical.”
California is even more varied economically than Oregon. Thornberg believes hiking wages in blanket fashion will spark layoffs and edge low-skilled workers out of the job market.
In the Central Valley, wages for all workers, on average, are lower than those of the coastal counties.
U.S. Census Bureau data show about 21 percent of workers in Bakersfield earned from $8 to $12 per hour in 2015, the most recent year for which data was available. In Fresno, 32 percent of workers were in that wage group, and in Modesto about 25 percent. Contrast that with Santa Clara County, home of Silicon Valley, which registered only 12.5 percent at that level.
The state’s diverse unemployment rates tell a similar tale. Unemployment in Bakersfield was 9.5 percent; 8.8 percent in Fresno, and Stanislaus County notched 7.9 percent. Compare that to Silicon Valley’s unemployment rate – 3.2 percent
“Part of our whole concern with (the $15 wage) is it’s a one-size-fits-all,” Rob Lapsley, president of the California Business Roundtable, told The Sacramento Bee last year. “Areas with double-digit unemployment, this is scaring them to death.”
Jamil Dada, chairman of the Riverside County Workforce Development Board, told the Sun that he believed the state’s Inland Empire will be hit harder than other parts of the state.
“It might be tolerable in the coastal regions,” he said. “Their business environment is completely different.”
As politicians insert their sausage fingers into subtle market mechanisms, scarcity and unintended consequences will ensue.
Joining San Francisco’s restaurant die-off was rising star AQ, which in 2012 was named a James Beard Award finalist for the best new restaurant in America. The restaurant’s profit margins went from a reported 8.5 percent in 2012 to 1.5 percent by 2015. Most restaurants are thought to require margins of 3 and 5 percent.
If what’s happening with one early adopter of the $15 wage progression is any indication, locally famous inland hash houses and burger joints from Calexico to the Cow Counties will disappear as mandated wages climb to $15 statewide. And that will only be the start of things.
Jeremy Bagott, a former journalist, writes about California finance and land-use issues. He wrote this for The Modesto Bee.