California’s newly enacted plan to raise the state’s minimum hourly wage from $10 to $15 over the next several years has generated significant attention — some heralding the various ways this increase will benefit workers and their families, but some suggesting potential risks a statewide $15 minimum wage poses for employment growth. Much of the concern, however, has been based on misperceptions about the effects of the higher minimum wage, or has put outsized emphasis on supposed impacts that either are unknown or have been found to be insignificant. Along the way, commentators have often remarked that California’s plan represents “uncharted territory” and a “bold experiment.”
California’s plan to bring the minimum wage up to $15 and the resulting coverage and commentary raise important questions about what we know and what we don’t know about the minimum wage, and a $15 minimum in California in particular. After taking a brief look at how California’s minimum wage increase is structured, this post separates out the facts from the fiction — underscoring both the crucial benefits of the $15 minimum wage and key considerations moving forward.
California’s Plan to Raise the Minimum Wage
California will gradually raise the minimum wage over the next six to seven years, or potentially longer depending on the condition of the economy and state budget. For businesses with 26 or more employees, the hourly minimum wage will increase by $0.50 in 2017 and 2018, then increase by $1 each year until it reaches $15 in 2022. For firms with 25 or fewer employees, these increases will be delayed by one year, meaning that the minimum wage will not reach $15 per hour for these smaller businesses until 2023.
The Governor may postpone a scheduled increase for one year if the state’s nonfarm jobs and retail sales receipts decline during specified periods before a wage increase is scheduled to take effect or if the state’s General Fund is expected to face a shortfall of more than 1 percent in the current fiscal year or in either of the two subsequent fiscal years. The Governor may only delay a minimum wage increase twice due to a budget shortfall before the minimum wage reaches $15 per hour for businesses with 25 or fewer employees, after which the minimum wage will typically be increased for all businesses each year based on inflation.
Although it’s important to consider the impact of this plan relative to what would have happened had no additional increases in the minimum wage been implemented beyond 2016 — which saw an increase to the current $10 per hour— it must be noted that had state policymakers not enacted this new plan, a similar and even steeper wage hike was likely to have been approved by California voters in this November’s election.
What We Don’t Know
Much of the narrative around California’s $15 minimum wage has focused on its potential effects on businesses and jobs — reduced business profit margins or even business closures and fewer jobs for low-income workers as employers reduce staff in order to accommodate higher labor costs. However, the research on raising the minimum wage generally is either inconclusive or finds very little or no effect on employment. For instance, one “meta-study” that reviewed 64 studies looking at the effects of minimum wage increases on teenage employment in the US conducted between 1972 and 2007 concluded either that there is no effect on jobs or that it is too difficult to detect an effect and/or the effect is very small. Another meta-study, which examined 27 studies conducted since 2000, concluded that “if negative effects on employment are present, they are too small to be statistically detectable [and] such effects would be too modest to have meaningful consequences in the dynamically changing labor markets of the United States.” It’s also important to bear in mind — beyond the research itself — that even after decades of various minimum wage increases at the national, state, and local levels, dire predictions about job loss have not been borne out.
Nevertheless, leading skeptics have argued that most of the studies that they consider to be most credible find evidence of negative effects on employment, although some experts point out that this interpretation of the research preceded a new wave of studies using more rigorous research designs. And in fact, more recent, better-designed studies, including one considered “probably the most important and influential paper written on the minimum wage in the last decade,” tend to confirm what earlier studies found: that minimum wage increases have little or no negative effects on employment. And although this conclusion continues to be challenged, even leading skeptics of wage hikes have found in their own recent work that minimum wage increases only modestly reduce teen employment.
How heavily can policymakers and other stakeholders lean on this existing body of research? It’s important to understand its limitations. For example, although the studies generally find that raising the minimum wage has little to no effect on employment on average, the effect on local labor markets could differ from the effect on the state’s labor market as a whole. Also, it is not possible to predict how a minimum wage increase that is larger than those studied previously might affect employment. As we discuss below, the size of California’s planned minimum wage increase actually falls within the historic norm, contrary to popular perception. However, there are two potentially important ways in which the planned increase stands out from past experience. First, California’s minimum wage hike may raise the minimum wage to a larger percentage of the median wage than has occurred in the state before. Second, the increase is expected to benefit a significant share of the state’s workforce, with even larger shares benefiting in certain regions of the state. The existing research simply does not allow us to infer how either of these unique features of California’s planned minimum wage increase might affect employment.
The bottom line is that because California, along with New York, will be the first states with a $15 minimum wage, we don’t know exactly how the experience here will play out or what the impact on employment will be. However, the lack of certainty about what a $15 minimum wage will mean for employment growth should not detract from what we do know about other economic effects that are equally if not more important: increased incomes and greater financial security for millions of Californians.
What We Know: A Higher Minimum Wage Can Bring Various Important Gains
California’s Minimum Wage Increase Will Benefit Millions of People
Well over one-third of California’s workforce — 5.6 million workers in total — are expected to see their earnings rise due to the higher state minimum wage, including workers who earn just above the current $10 hourly minimum and stand to benefit as employers adjust their pay scales upward. Questions and commentary about California’s minimum wage increase have often been based on misperceptions about who receives the wage, portraying these workers as younger, employed part-time, and poorly educated. The facts about the workers who will actually benefit from raising the minimum wage to $15 paint a much different picture. According to a UC Berkeley Labor Center analysis:
- Although they tend to be younger than the workforce as a whole, the vast majority of those who will benefit from the minimum wage increase — 96 percent — are not teenagers, contrary to the common perception. Further, nearly 6 in 10 (58 percent) are between the ages of 30 and 64.
- Minimum-wage workers contribute half of their families’ total earnings, on average, and well over one-third (37 percent) are supporting children.
- While minimum-wage workers do tend to have lower levels of education than the workforce as a whole, almost half (47 percent) have at least some college experience.
- Two-thirds of those who will benefit from the minimum wage increase work full-time.
A Majority of Small Business Owners Support Raising the Minimum Wage
Coverage of California’s minimum wage increase has emphasized its potential impact on small businesses, often focusing on small independent businesses, or “mom and pops,” and suggesting strong opposition to the higher wage. However, polling on proposals to increase the federal minimum wage show support from most small business owners, even among those who pay the minimum wage and those in industries most likely to be affected. For example, a 2015 poll of small business owners across the US conducted for the Small Business Majority found that:
- Overall, 60 percent support gradually raising the federal minimum hourly wage from its current $7.25 to $12 by 2020 and adjusting it annually to keep pace with inflation. Nearly half (45 percent) strongly support this increase.
- Exactly half already pay all of their employees $12 or more per hour.
- 58 percent of those paying $12 per hour or less to any employee — those who would be directly impacted by the proposed federal minimum wage increase — support raising the minimum wage to $12.
- 56 percent of businesses in the retail and restaurant industries, which tend to employ large shares of minimum wage workers, support this increase.
To our knowledge no comparable polls of California businesses are available. And although California’s plan raises the state’s minimum wage higher than would the federal proposal asked about in this poll, the federal proposal actually represents a much larger increase, in inflation-adjusted terms, than California’s plan.
According to the Small Business Majority, there are several reasons that small business owners support raising the federal minimum wage. A higher minimum wage would help them retain workers, level the playing field across businesses (many small businesses want to pay higher wages, but would be at a competitive disadvantage in doing so unless all businesses pay higher wages), and increase low-wage workers’ buying power, in turn boosting demand for businesses’ products and services.
The Small Business Majority poll is not the only indication of business community support for a higher minimum wage. A recent national survey of executives of companies with 25 or more employees commissioned by the Council of State Chambers found an overwhelming majority (80 percent) support raising the minimum wage in their state.
California’s Minimum Wage Will Boost Working People’s Economic Security After Decades of Wage Erosion
Raising the state minimum wage to $15 an hour will increase economic security throughout California by making it easier for workers to provide for themselves and their families. Decades of weak wage growth, combined with a failure to maintain the purchasing power of California’s minimum wage over the last 50 years by tying it to inflation (cost of living), have resulted in a growing share of workers earning low wages. And although the state’s minimum hourly wage was just increased to $10 this year, it remains 15 percent below its peak value in 1968. What’s more, it would have eroded even further had the state not scheduled any future increases. By 2022, California’s $10 minimum wage would have been worth only $8.66 (in 2016 dollars) — a substantial 27 percent below its peak value.
California’s newly enacted minimum wage increase corrects for the past mistake of not ensuring that the wage keeps up with the cost of living. The plan will not only boost the minimum wage above its peak value — from 1968 — but will also maintain that value over time by tying the minimum wage to inflation. This means California could reverse — in just a matter of years — the decades-long erosion in hourly wages for workers at the bottom of the economic ladder and help ensure that their wages keep pace with the cost of living going forward. The promise of higher pay is especially welcome news for parents who are raising children on just one paycheck, particularly in high-cost parts of the state where the earnings needed to afford basic necessities far exceed the state’s current minimum wage.
California’s Minimum Wage Increase Is Less Dramatic Than Some Have Claimed
California’s plan to raise the state’s minimum wage is not nearly as dramatic as some have claimed. A $15 minimum wage in 2022 is worth about $13 in 2016 dollars, which means that the plan will increase the minimum wage over six years by a total of about 30 percent, after adjusting for inflation. An increase of this magnitude is comparable to the wage hike implemented in the mid-90s, when federal and state legislation boosted California’s minimum wage from $4.25 in 1995 to $5.75 in 1998 (in nominal dollars) — a 28 percent increase in inflation-adjusted terms. But the current plan to reach $15 by 2022 actually represents a more gradual annual percentage increase than the mid-90s wage hike because that increase took place more quickly, over just three years. The mid-90s hike boosted the minimum wage by 8.6 percent per year, on average, compared with a 4.5 percent average annual increase for the newly enacted hike. California’s current plan will also raise the minimum wage more gradually than an increase implemented a decade ago, when the minimum wage rose from $6.75 in 2006 to $8 in 2008 (in nominal dollars) — a 5.2 percent increase per year, after adjusting for inflation.
Some commentators have argued that California’s plan to raise the minimum wage to $15 by 2022 represents an even larger increase than initially meets the eye because the state has already raised the wage by $2 since 2013. From this perspective, boosting the minimum wage from $8 in 2013 to $15 in 2022 (in nominal dollars) represents a 54 percent increase, after accounting for inflation — undoubtedly a much larger total increase than any in recent California history. However, because the raise spans 9 years, it actually represents a more gradual average annual increase (4.9 percent per year) than prior increases.
It’s also important, as noted above, to consider that most of the increase in the state’s minimum wage under the plan to reach $15 by 2022 will simply restore the real value the minimum wage has lost over the past half century. If California had maintained the purchasing power of the minimum wage since 1968 — that is, if it had tied the minimum wage to changes in the cost of living — it would be about $11.80 per hour today. Under the current plan, the minimum wage won’t have its lost value restored until 2020. Then, in 2022, after two more years of increases, the minimum wage will exceed its 1968 value by only around 10 percent.
The Minimum Wage Can Work in Combination With Public Supports to Increase Economic Security for Millions of Californians
For many working people throughout California, particularly those in high-cost parts of the state, maintaining a decent standard of living requires more resources than a minimum wage salary can provide on its own. That’s why a higher minimum wage should be viewed as complementary to a number of supports that help working families and individuals make ends meet. Although a wage increase can reduce or eliminate some of the public supports that low-income families use to pay for basic expenses, in general working families are still likely better off when they earn a higher wage. Higher earnings, together with such public supports as CalFresh food assistance and tax credits for working families can put economic security within more people’s reach. Estimates from the Legislative Analyst’s Office (LAO) show that a $15 minimum wage, together with CalFresh and the federal Earned Income Tax Credit (EITC), will lift full-time minimum wage workers supporting two children above the poverty line in many parts of the state where the current $10 minimum wage isn’t enough to do so, even in combination with these supports. (And this analysis is based on the Census Bureau’s better, alternative measure that accounts for California’s high cost of living and also factors in the higher payroll taxes that result from a higher wage.) Building on the LAO’s analysis, we find that after fully accounting for federal income tax credits, such as the Child Tax Credit, a $15 minimum wage will likely help to pull these families right up to or above the poverty line in every county in the state where the current $10 minimum wage isn’t enough to do so even in combination with other key supports.
The Road Ahead
The enactment of California’s $15 state minimum wage is, of course, not the final word, as state leaders will be able to make adjustments over time to deal with the current unknowns. The plan to reach $15 by 2022 includes provisions for delaying the scheduled increases if the economy weakens or the state budget is projected to face a deficit, as discussed above. In addition, because the increase will be implemented gradually, policymakers will be able to monitor its effects and make additional adjustments if necessary. For example, it will be important to look at how the minimum wage increase affects lower-cost regions of the state, where the wage hike is expected to have a much greater impact, and also how it affects workers’ access to subsidized child care, which low-paid workers need in order to work.
While issues like these should be closely monitored, we agree with the Economic Policy Institute that California’s plan to raise the minimum wage shouldn’t be dismissed as ill-conceived just because some of its effects are unknown. On the contrary, there are significant positive effects: raising wages for more than one-third of California’s workers, undoing decades of falling wages, and improving economic security for millions of Californians, all of which contribute to creating more broadly shared prosperity in California.
— Alissa Anderson and Chris Hoene