During every election cycle in California the minimum wage debate has always been on the radar. One side of the aisle argues that people are simply not earning enough to survive in California. The other side warns that increasing the wage will inadvertently make everything more expensive. At first glance, both these arguments make sense. If workers can’t afford rent, shouldn’t they earn more money? If businesses have to pay more wont these costs simply transition to the buyers?
Raising the pay can potentially affect affordability in the short term, but it hasn’t been the main reason why California got so expensive in the first place. The politicians in California are aiming at a symptom of the disease, but they aren’t treating the disease that’s killing California. Housing and rent need to be the main discussion of this argument. First lets tackle the minimum wage problem.
Minimum Wage Argument
Let’s start with the argument for increasing the minimum wage in California.
If someone is working 40 hours a week, most people would agree that they should be able to for the basics such as housing, groceries, transportation, and healthcare. Unfortunately, that’s becoming increasingly difficult in many parts of California.
For example, Los Angeles recently increased it’s minimum wage to more than $18 dollars an hour. However, many full time workers still struggle to afford even a modest apartment.
Supporters argue that wages haven’t kept up with the cost of living. From that perspective, increasing the minimum wage isn’t about making people wealthy, its more about helping them keep pace with inflation. There’s also evidence that suggests moderate increases in wage don’t necessarily nuke the market as critics argued it would.
The $20 dollar fast food increase helped increase the wage substantially which had limited affects on employment.
This doesn’t mean there were no downsides, but it does suggest the issue isn’t black ad white as it’s sometimes portrayed.
Critic’s Facts
This is where the debate gets fun and interesting. One criticism that deserves more attention is what happens to small businesses?
A multinational corporation can spread higher labor costs across thousands of locations, negotiate better supplier contracts, or invest in automation.
What happens to Dan’s Burgers, Casey’s Ice Cream, or Ye’ Old Tavern? A family owned restaurant doesn’t have the luxuries that multinational corporations have. If a business is operating with small profits each year, another increase in minimum wage might force difficult decisions.
- Some raise prices
- Others reduce employee hours
- Positions get eliminated entirely
- Sadly, small business owners fail
There’s also the issue of wage compression. If entry level employees receive large raises then what happens to their supervisors/managers? Well they expect raises as well and that ripple affect increases payroll beyond the minimum wage increase by itself.
Critics argue these costs eventually work their way through the economy, contributing to higher prices that everyone pays, and including the people who never got the raises in the first place (middle class). This is a legitimate concern.
Did Restaurants Close?
This is where politics often get ahead of evidence. Yes, restaurants closed. Yes, some reduced staffing. Yes, prices of food increased. Yes, some restaurants went to automation.
The thing some people don’t want to talk about is restaurants were already facing higher food costs, rising insurance premiums, expensive commercial rent, inflation, and changing consumer habits.
The question shouldn’t be did restaurants closed. The question should be whether they closed because of the minimum wage increase. Well. We don’t have an answer as researchers disagree and have different studies that prove both sides.
Some studies show California lost thousands of fast food jobs after the wage increase. Others show little measurable impact on employment overall. The truth is probably somewhere in between.
The minimum wage increase likely added pressure to an industry that was already under significant financial strain, but difficult to argue it was the lone cause for every closure.
The Bigger Problem
This is where the conversation changes. Let’s imagine in a perfect world everyone’s paycheck in California increased by 20%. Would there suddenly be more apartments available in Los Angeles. Would San Francisco magically have thousands of new homes?
Would traffic disappear and healthcare become cheaper? The obvious answer is no. California’s main affordability problem isn’t just income, but housing. For decades, demand has grown faster than supply in many of California’s largest cities.
When thousands if not hundreds of thousands of people are competing for too few homes, prices naturally increase. If wages do rise while housing stays on the same trajectory, landlords know tenants have more money available to spend.
In other words, higher wages can help people survive today’s costs, but they don’t necessarily reduce those costs tomorrow. That’s why many economists argue California can’t keep increasing minimum wage to out-wage its way out of a housing shortage.
Never Ending Debate
The reason this conversation becomes so politically charged is because both sides are looking at different pieces of the same puzzle. Supporters think increasing minimum wage will solve the problems of affordability. Critics argue businesses are struggling to absorb another increase in operating costs.
Both observations are true. The disagreement is over which problems deserve priority.
My Conclusion
After reading through the research, I’ve come away with a different perspective than I had initially.
Raising the minimum wage can absolutely help workers earn more money, and many studies suggest the overall economic effects are smaller than critics sometimes claim.
At the same time, it’s difficult to ignore the challenges facing small businesses that are already operating on razor thin margins. Every increase in labor costs becomes another expense that has to be absorbed somewhere. Additionally, bigger companies can absorb the costs way easier than small businesses.
But if we’re asking what has made California one of the most expensive places to live in America, I don’t think minimum wage sits at the top of the list. Housing does.
Until California builds enough homes to match the number of people who want to live there, affordability will likely remain out of reach for many residents regardless of how high the minimum wage climbs.
Lastly, the main problem with the world economy was the amount of wealth that was created during the 2020 pandemic. Trillions on trillions were printed throughout the world which caused massive inflation not only in America, but throughout the world. Some argue the affordability crisis could be from this point in time where everything got much worse. Specifically America’s economy was in peril in 2023. Some critics stated this was due to Biden and his Bidenomics, but in reality nobody could have been ready for what happened during that time period.
Small Notes
How did some restaurants including major corporations react to the increase in the minimum wage to $20?
- Raising Prices
- Reducing Hours
- Slowing Hiring
- Increasing Automation
- Eliminating Positions
- Closing Weaker Locations
Why do chains survive better than small businesses?
Local small businesses usually operate at thin margins of 4% to 6%. So a business making $1,000,000 has $960,000 in expense. This means their overall profit that year would be $40,000 to $60,000.
- If the labor costs increase by 5% it would equate to $50,000 which they would start losing money or barely making money.
- For large corporate chains a 5% increase to minimum wage is easier to deal with as their profit is hundreds of millions.
- Increasing minimum wage often favors large companies. They are better equipped to handle those costs.
Why is California a big problem in this situation of affordability?
- Extremely expensive housing
- High taxes
- Expensive insurance
- Strict regulations
- High utility costs
- Comparatively higher wages
If people earn more, but housing stays the same. The landowners will simply just ask for more money which people will have to pay. Limited supply creates higher demand.
Why do the middle class not like this situation?
- Worker A earns $16 and now earns $20.
- Worker B earns $70,000 per year but receives no increase.
If grocery prices or fast food prices increase by 3% then Worker B effectively becomes poorer in purchasing power. The middle class basically just gets squeezed even more.
Build more houses? Why don’t we just build more houses and apartments?
The answer is that building in California has become incredibly expensive. Developers face:
- Years of permitting
- Environmental reviews
- Engineering studies
- Impact fees
- Financing costs
- Labor shortages
- Insurance
- Rising material prices
Even after a project is completed, owners still have to cover high operating costs like maintenance, utilities, property taxes, insurance, and regulatory compliance. None of these expenses are unreasonable on their own, but together they make housing significantly more expensive to build and operate, limiting new supply and keeping prices high.