Los Angeles' $30 Olympic wage reveals why businesses are fleeing California
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If you want to understand why businesses are leaving California, investors are looking elsewhere and mainstream economics seems to have disappeared from public policy, look no further than Los Angeles.
In a move that should come as no surprise to anyone familiar with California politics, Los Angeles leaders have approved a plan to push hotel and airport workers' wages up to $30 an hour. Supporters call it the “Olympic Payoff,” arguing that workers should benefit from the economic activity generated by the 2028 Summer Olympics. While that may sound sympathetic, it reveals a fundamental misunderstanding of how businesses work and how capitalism works in America.
The problem is not that politicians want workers to get more money. Everyone wants workers to earn more money. People need a good living wage.
The problem is that Los Angeles continues to believe that it can create wealth by passing laws instead of creating the conditions that allow businesses to thrive.
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That is not economics. That's a dream world. As the owner of six small businesses, I am the last person who wants the government to sideline my business.
Here is the truth that politicians don't want to admit right now. Salaries are not set by city councils. They are built by owners who become successful in a free market society and pay those workers who help them get there along the way. Businesses pay people more when they create more value, earn more profit and compete for talent. That's how free markets work. High wages are often the result of successful businesses, not government mandates.
When the government mandates that labor costs rise dramatically, business owners simply absorb the cost and carry on as usual. They are forced to make difficult decisions. Some raise prices for consumers. Others are reducing staffing levels, reducing employee hours, delaying expansion strategies or accelerating investments in automation. And in a state like California, some simply decide their next investment, expansion or rental decision will take place elsewhere, like Nevada, Florida or Texas.
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There is no magical situation where labor costs increase by double digits, prices stay the same, profits remain untouched, businesses hire more workers and everyone somehow comes out ahead. That's not the economics of Los Angeles, wishful thinking.
All businesses operate with limited resources. If politicians raise one cost, there must be another. The question is not whether employers will respond to a lower $30 wage. The question is how they will respond and history suggests that the response has never been the way politicians promised.
The most frustrating thing is that Los Angeles keeps making the same mistake over and over again. The city is struggling with affordability, homelessness, public safety concerns, budget pressures and a business environment that many employers have come to regard as hostile. Yet the response from elected officials is almost like a playbook of more rules, more regulations, and higher costs for the private sector.
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It's like city leaders believe that businesses have unlimited power to find new costs without consequences.
They don't.
If you want to understand why businesses are leaving California, investors are looking elsewhere and mainstream economics seems to have disappeared from public policy, look no further than Los Angeles.
The local hotel industry has already warned that higher labor costs could reduce rents, delay renovations, reduce future investment and, ultimately, make Los Angeles less competitive as a tourist destination. It happens of course despite the Olympics. Airlines, hoteliers and business groups have repeatedly raised the alarm that policymakers are ignoring basic economic facts in favor of political talking points.
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The irony is that Los Angeles is preparing for one of the biggest economic opportunities in its history. The 2028 Olympics should be an opportunity to attract investment, create jobs, increase tourism and promote the city to the world. Instead, city leaders seem intent on using the event as an excuse to impose policies that would discourage the very businesses responsible for creating those opportunities in the first place.
What many politicians fail to understand is that money is spent. Businessmen are leaving. Mobile businesses. Investors can choose where to send their resources and, increasingly, they are choosing places with low taxes, low regulations and leaders who understand that businesses are partners in economic growth and not enemies to be managed.
The pattern is becoming painfully familiar. The same politicians who cause problems are surprised when companies choose to expand elsewhere. The result is a weak business climate, fewer opportunities for workers and, ultimately, a smaller tax base to fund the very programs the politicians claim to support.
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The best way to create high incomes has never changed. Encourage businesses. Reduce unnecessary controls. Return on investment. Help businesses grow. When companies succeed, employees benefit. When businesses compete for talent, wages naturally rise.
That is how America became the most prosperous economy in the world.
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Los Angeles seems committed to testing a different theory in the strange world that politicians can simply vote prosperity into existence.
Unfortunately for taxpayers, employees and business owners, the truth always gets the last vote.
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Los Angeles has no income problem.
It has a leadership problem.
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