…and costs to the consumer as well as the worker….

California is about to raise its minimum wage to $10/hr.  Washington (the state, not the capital, so far), has a current minimum wage of $9.19/hr, and that’s tied to inflation.

However, neither labor nor the wage paid for it occur in a vacuum.  Labor is required to produce the good or service being sold, and the wage paid the laborer—whether CxO or line worker—has a direct impact on the minimum price the producer must charge for that good or service in order to stay in business.

Labor costs amount to about 10% of the cost of a car sold to you at the dealership.  Not many cars are produced in California—or Washington—though, so minimum wage increases in these two states won’t impact the prices Californians or Washingtonians must pay for their cars.  Labor costs in the restaurant industry, though, run to 25%-30% of the cost of the meals sold, with the high end coming in sit-down restaurants, the low end in fast food restaurants.

Labor costs as a per cent of the cost of the the end product or service being sold vary widely across industries (vis., auto vs restaurant); I’m going to focus on the restaurant industry for illustration.

California’s rise in its minimum wage, a 25% increase over its existing $8/hr minimum, will have a commensurate impact on the cost of meals bought in these places.  In a sit-down restaurant, that increase in cost can amount to meal price increase of 7.5%.  Factoring in the impact on the business’ payroll taxes for Social Security and Medicare/Medicaid (and eliding the payroll tax that California charges), we get an additional labor cost increase through those taxes (7.65%) of 1.9%, for a total labor cost increase in the price of a meal of 9.4%.  That’s what consumers can look forward to in the inflation of their price for a relaxing dinner out.

Here’s where the tie to inflation comes in: Washington’s tying minimum wage increases to its inflation guarantees that that state’s inflation will be higher than it otherwise would: by that state’s labor cost impact on the prices of goods and services sold there.  This feeds back into its mandated inflation-driven rising minimum wage.  And the vicious circle is up and running.

Of course there are other ways California restaurants can deal with a 25% increase in labor costs.  In order to hold down the total cost of their labor force and thereby keep their meal price increase down to something more marketable, they can either eschew hiring the additional labor with whom they were considering expanding (and not expand), or they can lay off existing workers, or both.  Either way, the restaurants end up using fewer workers to do the same amount of, or more, work.

It’s important to note at this point that food service companies can function very well with low-skill—minimum wage—labor, while other industries (vis., auto assembly) need skilled labor, pay commensurately higher wages, and so are little impacted by minimum wage requirements.  It’s the low-skill, low-wage worker that’s hurt by minimum wage laws, yet it’s these guys who need to get that first job so they can start accruing the experience and training and skills necessary to get better jobs.  Or that need this second job so they can save a little, put a little by for their kids’ college, and so on.

Government-mandated minimum wage increases are job killers.  And they kill the jobs with the greatest marginal value for a nation’s economy and for the individual worker: the low-skilled worker on the cusp of having a job at all.