The Effects of the Proposed California Minimum Wage Increase

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“Living wage” laws, which require employers to pay high, entry-level wages, regardless of skill or productivity, are spreading rapidly among local governments across the country. The philosophy behind the living wage laws is that the government should require employers to pay workers according to their need, not according to their productivity. However, these laws require that an employer pay all of its employees a minimum wage regardless of the employee’s productivity or family income. This is a radical departure from both free market-based wages, and income-conditioned safety-net programs, which have been the norm in this country with a few exceptions. Currently 82 local governments, including 16 in California, have passed such living wage laws. In addition, living wage campaigns are active in approximately 125 other jurisdictions, including 15 in California.

Initially, such laws were narrowly drawn to cover only employees of local governments or their contractors. However, increasingly, the living wage movement has been advocating high minimum wages that would apply to all private sector employers within a defined geographic area. An example is Santa Monica, which has passed a law requiring all employers in the “Coastal Zone” to pay at least $10.50 an hour if stipulated health benefits are provided, and at least $12.25 an hour if benefits are not provided. Another example is Berkeley, which covers all employers in the Berkeley Marina, city-owned public land. The movement is also pushing for a city-wide minimum wage in New Orleans that would be tied to the federal minimum wage.

In view of the startling successes and growing demands of the living wage movement, it is very timely and relevant to assess the likely economic effects of such laws on the California economy and its workers. This report examines the employment and income consequences of setting a minimum wage of $10.25 an hour throughout California, effective on January 1, 2003. A minimum wage this high is definitely within the sights of the living wage movement. For example, a current California ballot initiative would raise the minimum wage to $10.29 an hour.

Five broad conclusions have been reached. First, such a minimum wage would result in nearly 280,000 California workers losing their jobs. Second, California employers would see their wage costs rise by over $12.5 billion a year. Third, the workers affected by the wage hike would be younger and less educated than the average California worker. Fourth, many of the projected wage gains would go to low-wage workers in higher income families, rather than to those most in need. For example, about 30 percent of the wage gains would go to workers in families with incomes over $40,000. Finally, less than one-quarter of the affected workers are the sole earner in a family supporting one or more children..

Because such a wage hike would be poorly targeted at poor families and would cause unreasonable and unnecessary harm to the California economy and its workers, such proposals for minimum wages should be rejected. Instead, California should join the 16 states that have adopted an earned income tax credit to assist its low-income families. Such a solution directs resources directly to poor and near-poor families, encourages work, and does not discourage employers from hiring low-skilled workers.