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Los Angeles Is Flirting With a $25 Minimum Wage Law. That Would Be a Mistake

The city of Los Angeles is expected to hit a boom of tourism in the upcoming years. Two major worldwide sporting events: the FIFA World Cup and the Olympics are set to visit the city in 2026 and 2028, respectively. The influx of tourism to the city will undoubtedly serve as a major revenue source for businesses throughout the region. In anticipation of the forthcoming boom, some officials in the region and also the state of California are proposing an increase in the minimum wage.

As of January 1, 2023, the statewide minimum wage is $15.50 an hour, with several counties approaching $18 an hour. Los Angeles city council member Curren Price has proposed a plan to drive the minimum wage up to $25 an hour, with the overall goal to increase it by a dollar each year until 2028, making the minimum wage $30 an hour. While this was originally aimed at local hotel and airport employees, some politicians are pushing for an increase in all retail sectors, including tourism.

An introductory lesson in microeconomics is enough to inform a student that minimum wage hikes are typically a bad proposition. To non-economists, increases in the minimum wage mean alleviating poverty and protection from greedy employers.

But it’s not that simple.

The minimum wage is a classic example of what economists call a price floor. Unlike price ceilings where prices are artificially set below market value to appease buyers, a price floor sets a minimum price that will be higher than the market value.

In the case of a minimum wage, the sellers are selling their labor, more specifically lower-skilled labor. An abrupt increase in employee wages would undoubtedly be reflected in an overall increase in the price of goods and services, causing a loss in revenue and potential layoffs. Instead, politicians in the region should let the massive tourism expected from major sporting events in Los Angeles push the demand for labor up. In response, the market process will naturally raise wages for workers.

Introducing minimum wage reforms also tends to lower the demand for low-skilled labor. If the minimum wage is to continue to grow, overall wages will become comparable to workers in higher-skilled jobs. Imagine, just for a second, that we operate in a world where lower-skilled workers and higher-skilled workers are paid similarly.

Who might a firm choose to employ?

I’d argue the higher-skilled worker. Their expected output will be much higher, and their increased productivity will likely bring greater profits. Essentially, employers will change their preference, opting to hire workers who may have specialized training and college degrees, for a future investment in increased productivity. This is preventable. The key is to have a greater separation between the wages of low and high skill workers..

There is something to be said about the immorality that the minimum wage presents. At its core, the price floor law is artificially and quite literally setting the value of your labor, despite whether a firm agrees or not. Eliminating the opportunity for a firm to expand its business by stating that it must pay people a certain amount hinders the opportunity to hire more. Both buyers and sellers of labor (firms and employees, respectively) are willing to interact and work below the minimum wage. Why? It’s mutually beneficial for both parties. So, allow them to. Otherwise, you’re left with a deadweight loss.

Los Angeles’s tourism sector is already preparing for the upcoming wave of visitors. The FIFA World Cup and the Olympics are expected to inject millions of dollars into the local economy, predominantly spent on accommodations, transportation, dining, and shopping. It is crucial that policymakers adopt a hands-off approach so businesses and workers in the city can harness the opportunities provided by these events.

Content syndicated from Fee.org (FEE) under Creative Commons license.

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