The Effects of the Proposed California Minimum Wage Increase

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On August 23, 2004 the California legislature passed an increase in the minimum wage to $7.75 an hour. This study evaluates the consequences of the proposed increase, with a focus on the potential impact on California’s labor market.

This report, by Dr. David Macpherson from Florida State University and the Employment Policies Institute, uses Current Population Survey data and labor demand estimates (as reported by a consensus of economists) to show that the proposed increase will be an expensive mandate on the employers of California.

Overall, the proposed increase is inefficient and detrimental to many of those it is intended to help. This study estimates that approximately 18,600 California employees will lose their jobs because of this mandate. These employees will lose a total of $220 million in income, while employers will face $738 million a year in net new costs.

One in four dollars spent as a result of this mandate will go to low-wage employees in families earning more than $40,000 a year. This results from the fact that the minimum wage is a blunt policy, unable to determine between a low-wage teenager (who may live in a wealthy family) and a low-income employee supporting a family. In reality, very few beneficiaries of this wage increase are actually raising a family on a single minimum wage income, as many policy makers have claimed. According to United States government data, only 20% of the potential beneficiaries from this wage increase are actually single earners with children. The remaining 80% are teenagers living with their working parents, adults living alone, or dual-earners in a married couple.

While families that benefit from the wage increase may see a boost in earnings, many families will ultimately lose as a result of this mandate. Families who are eligible for means-tested benefits like food stamps will lose a substantial portion of their benefits, and may lose their eligibility altogether. This will greatly limit the ability of the minimum wage to improve the quality of life for beneficiaries. Even worse, many family heads will see their hours reduced — or lose their jobs altogether. Of the 18,600 individuals who will lose their job if this wage increase goes into effect, 45% are living in families earning less than $25,000 a year. A majority of these employees don’t have a high school diploma, decreasing their chances of finding new employment (the unemployment rate for adult high school dropouts was 8.3 percent in July — 51% higher than the national level). Certain minority groups will also suffer disproportionate harm. Hispanics, for example, make up only 31 percent of the total California labor force — yet they account for 58 percent of the job loss from the proposed increase.

Essentially, much of the increase comes directly out of the pockets of those least-skilled employees who will lose their jobs.