The manufacturing of apparel, outerwear clothing, is in peril in California. Textile production has been shifting out of the United States for the last few decades, but some clothing is still being made in the USA. Now the last fragments of apparel making in California will shut down.

While some political candidates have blamed trade for the textile exodus, that is not the full explanation. Taxes on the wages of workers and on the profits of companies are passed on as higher prices of goods. To some extent, taxes on wages and on the purchase of goods are also passed onto lower net wages. How much is passed on where, depends on how workers and consumers respond to higher after-tax prices. When workers’ wages cannot be pushed down, and global competition prevents passing the tax to buyers, the marginal firms that barely have enough profit to survive shut down or move abroad when taxes make the products too expensive.

A legal minimum wage acts like a tax on the employers of lesser-skilled labor. Does it makes sense to tax-punish the very employers of low-wage workers to make their labor more expensive? In the long run, the higher cost of labor will either shift production to locations with lower labor costs, or else shift production to products or methods that require less labor.

A legal minimum wage acts like a tax on the employers of lesser-skilled labor. Suppose that a worker is paid $10 per hour, and there is a tax on the employer of $5 per hour worked. The government then transfers that $5 to the worker as a subsidy. The effect is the same as a $15 minimum wage. In effect, the minimum wage is a tax focused on the employers of low-skilled labor. Does it makes sense to tax-punish the very employers of low-wage workers to make their labor more expensive?

A fundamental cause-and-effect principle in economics is the “law of demand,” which tells us that in production, a higher price results in a lower quantity demanded or bought. When government forces labor to be more expensive, the money has to come from someplace. In the long run, a tax on labor will not reduce the rate of return on assets and enterprise, because if the return gets lower than normal, the business shuts down, or flees to better pastures, or hides underground from the tax collector.

In the long run, the higher cost of labor will either shift production to locations with lower labor costs, or else shift production to products or methods that require less labor. The minimum wage is only the beginning of labor costs. US employers also have to pay social security taxes, insurance for injuries, unemployment insurance, and they bear litigation costs. The minimum wage plus taxes have priced much of US labor out of the global market.

Now California has enacted a $15 minimum wage, and by 2022, taxes will make labor cost at least $20 per hour, If the next garment worker is not producing $20 worth of product per hour, he will not be hired. A headline an article by Shan Li and Natalie Kitroeff in the Los Angeles Times, 15 April 2016, declared, “California minimum wage hike hits L.A. apparel industry: 'The exodus has begun'”. Textiles and fashion were once a major industry in Los Angeles. Now, the combination of the minimum wage and taxes are pushing out the remaining producers.

Garment making in Los Angeles County has already been reduced by 33% since 2005, with a similar reduction in employment. The shift out of L.A. will continue. “After years of net losses, moving production out of Los Angeles is necessary for the survival of American Apparel,” one of the larger manufacturers.

The advocates of higher minimum wages say, quite rightly, that without a high minium wage, low-skilled workers would not be able to afford housing and other living costs, and would turn to governmental welfare aid. But the alternatives of poverty versus minimum wages is a false choice. Another way to artificially increase the incomes of the poor is the earned-income tax credit. The US income tax lets low-wage workers reduce their taxes with a credit, and if their income is very low, they get money from government instead of paying taxes.

Therefore instead of state and local governments imposing higher taxes on employers via minimum wages, the federal government could increase the earned income tax credit so that the income of the worker would be the equivalent of the $15 hourly wage. That would tax the whole economy rather than only the employers. That would raise wages without increasing unemployment and pushing firms to shut down or move out.

The best solution is not an artificial increase in incomes via redistribution but rather a proper initial distribution of income. In a proper distribution, there is no tax on wages, neither on the worker nor on the employer. Public revenue instead comes from land rent.

The best solution is not an artificial increase in incomes via redistribution but rather a proper initial distribution of income. In a proper distribution, there is no tax on wages, neither on the worker nor on the employer. Public revenue instead comes from land rent. Part of the public revenue pays for public goods, and part is distributed directly to the people in equal shares of money. When workers keep their wage and receive a share of rent, they don’t need a high minimum wage or tax credit, because the market has provided the typical low-skilled worker with the means to pay for the normal cost of living.

It is impossible to forecast what the wage would be in a pure rent-sharing market economy, but the law of demand indicates that, with taxes removed from labor and investment, economic growth would be dazzling. The fashion and garment industry would return to Los Angeles and other locations from which it has fled, along with much of the other manufacturing which flees, hides, and shrinks when taxed. Really, the only lasting solution to job shrinkage and production exodus is to tax only what can not hide, flee, or shrink: land value.

© Text Copyright Fred Foldvary, Ph.D. rights reserved.
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