By 2022, California will be tied with the District of Columbia for the highest minimum wage at $15 an hour. Gov. Jerry Brown signed Senate Bill 3 on April 4, 2016, which enacted an increase in the minimum wage by $1 per year until it reaches $15.
This legislation was pushed through with incredible speed, and not a single Republican voted in favor — per everyone’s expectations.
Democrats argued that people can’t live on $21,000 a year. Valid point, but the solution they proposed won’t fix the problem.
One of the things they failed to consider was wage push inflation.
Whenever there is an increase in wages, corporations are forced to either raise the prices of their goods and services or cut employees. In an attempt to keep unemployment low, they choose to raise prices.
As the cost of goods and services increases, the wages needed to compensate increase as well. Naturally, this launches an endless cycle of higher costs and higher wages.
The solution? Break the cycle.
Classical economists believe that the economy, left to its own devices, will regulate itself. This process of self-correction applies to wages as well.
As old wage contracts expire, wages will drop. As wages drop, so will the cost of business. When the cost of business drops, so do the prices.
Unfortunately, Democrats don’t have a classical bone in their bodies. That’s not a jab – that’s the truth. During the last recession, they called for higher wages when lower wages were needed for self-correction.
They believe that government intervention, known amongst economists as the Keynesian approach, is the key to a steady economy. The problem with this is the cycle it perpetuates. It prolongs problems; it doesn’t fix them.
While this is clearly a state issue, it’ll have local ramifications. You can expect either a rise in unemployment or a rise in prices here in Santa Clarita in the coming years.
These are the unintended consequences of a higher minimum wage.