California Just Passed A $1.7 Billion Tax On The Whole Country That No One Noticed

The California State Assembly recently passed a bill that received minimal recognition by the press, outside of the state, but has substantial negative consequences for basically everyone in the country.  Once signed by Jerry Brown, the bill, known as AB 1066, will make California the only state in the entire country to provide overtime wages to ag workers after 8 hours a day or 40 hours per week.  This change will add about $1.7BN annually to the cost of growing food in California which will ultimately be passed along to consumers.  And since eating isn't really optional, this is effectively a $1.7BN tax that California has decided to levy on the entire country.  Worse yet, increasing food prices is essentially the most regressive form of "tax" possible given the disproportionate share of wages spent on food by low-income families.  And, while you may not know it, California is an agricultural powerhouse that produces roughly 1/3 of all vegetables consumed in this country and 2/3s of the fruits and nuts.

Now, we know what you're thinking...why would everyone be entitled to overtime pay at 40 hours per week except farm workers?  Well, there is logic behind the exclusion and it has to do with the seasonality of farming.  Unlike most industries, farmers are not able to spread their labor needs throughout the year due to harvest schedules and the perishable nature of their crops.  But farm workers aren't the only ones excluded from overtime pay.  In fact, California has established special overtime rules for hourly workers in a number of other highly-seasonal sectors, including firefighters, actors and ski-resort employees, to name a few.

As you can see from the chart below, the total number of people working in the ag industry in California spikes by about 33% starting in May every year and remains elevated for about 6 months through October.  We've only graphed 2015 but the seasonal ramp is very similar every year. 

California Farmworkers

 

Under current California law, farm workers receive overtime pay after 10 hours per day or 60 hours per week (California is one of the only states that provides any overtime pay for farm workers at all).  As such, during the peak season the ag industry in California has grown accustomed to working 6-day, 60-hour work weeks.  But now, with AB 1066, farm workers will receive overtime pay after a 40 hour work week instead of 60.

So we took a stab at calculating what that means for California farm wages, assuming aggregate labor hours have to remain the same, and turns out it's about $1.7 billion.  Of course, all of these changes (including minimum wage levels) get phased in over time but $1.7 billion is the rough impact in the long-run.

Now, some people will suggest this calculation overestimates that impact of AB 1066 because farmers will simply hire more workers to cut down on their overtime exposure.  But, anyone who has experience in or around California farming will know that the ag labor markets are extremely tight.  Therefore, the idea of finding an extra 100,000 seasonal employees during peak harvest is not really feasible.

 

What this really means, of course, is that capital projects aimed at minimizing labor just become even more attractive to farm owners (something we also discussed here: "As Robots Replace Farm Workers, Why Payback Is A Bitch").  It also means that agriculture will continue to migrate to cheaper production areas like Mexico and South America which probably isn't the greatest thing for America's food safety and security...but that's a topic for another time. 

And speaking of labor-reducing capital projects, this week in Iowa, Case unveiled their first autonomous tractor complete with cameras, radar, GPS and tablet remote control but it's missing 1 key thing...a seat for a driver.

Autonomous Tractor

Autonomous Tractor

 

So good luck, California, with your latest round of meddling in the labor markets.  We suspect in the long-run you'll get a lot more of these autonomous tractors and higher unemployment for your efforts.