"We have to stop touting the minimum wage as a completely harmless policy, or as some kind of remedy for poverty and income inequality… it is neither." 

LOS ANGELES, June 20, 2024 /PRNewswire/ -- In the past 18 months, California's unemployment rate has jumped to the highest in the nation and a new analysis by Beacon Economics suggests that this peculiar increase could be a direct result of the state's recent minimum wage hikes. Most concerning, according to the report, is that the current unemployment effect is specifically harming some of California's most vulnerable residents—the state's youth.

The new report highlights the fact that 90% of newly unemployed Californians over the past year and a half are under the age of 35 with the hardest hit group being teenagers. "This loss of youth work opportunity carries with it real long-run harm," said Christopher Thornberg, Founding Partner of Beacon Economics and co-author of the new analysis. "It not only denies younger workers a critical source of income it deprives them of work experience that has been empirically shown to improve their chances of long-run success."

While the recent rise in unemployment in California has occurred in tandem with the state's minimum wage hikes, the relationship likely extends beyond mere correlation. According to the analysis, the jump in unemployment is incongruous with other measures of the California economy, which have continued to expand at a respectable rate. In fact, both output and household income in the state are robust and growing either faster than or similar to the nation overall. Yet, the unemployment rate in the United States as a whole has barely budged in the past 24 months.

And there is yet another anomaly: throughout the recent rise in unemployment, there has been no corresponding increase in unemployment insurance claims. If laid off tech and entertainment industry workers were driving California's higher unemployment rate, it would almost certainly be reflected, at least to some degree, in UI claims, according to the analysis.

"For far too long, researchers and advocates alike have held up the minimum wage as a harmless and effective policy remedy for poverty and income inequality, but it is neither of those things," said Thornberg. "Evidence has shown us that minimum wages don't do much to address the ills they are intended to correct, but carry a substantial cost, particularly for our state's future workers."

Although well intentioned, Thornberg, and co-author Niree Kodaverdian, argue that higher minimum wages cause prices to increase, which end up reducing real incomes for lower-skilled workers. Available data and past empirical studies show that wage floors do very little to divert income from higher income workers to lower income ones, which is how minimum wage laws are typically characterized by proponents.

The specific effect on youth is caused because as labor costs go up relative to other inputs, employers who might have used lower-skilled, entry level workers, such as teenagers, move towards hiring older, more experienced workers, according to the analysis. The idea is that if an employer is legally obligated to pay a higher wage, they will naturally hire more skilled and productive workers to offset higher labor costs. Since those under age 25 make up nearly half of minimum wage workers, this restructuring disproportionally affects the state's youth.

The report firmly acknowledges the need for policies to help alleviate the strain on lower income households in pricey California but argues that this particular policy remedy doesn't work as intended, and when pushed too far, can inflict real harm on some of the state's most vulnerable residents. Better policy options, according to the authors, include the Earned Income Tax Credit, early childhood education, and increased training for lower-skilled adults.

Beacon Economics LLC is an independent economic research and consulting firm based in Los Angeles. Learn more at www.BeaconEcon.com 

Contact:               Victoria Pike Bond                         
Phone:                 415-488-7195
Email:                   Victoria@BeaconEcon.com

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SOURCE BEACON ECONOMICS