How Much Would a Higher Minimum Wage Cost the State?

Two weeks ago, the Brown Administration raised eyebrows by using the Governor’s proposed budget to cast doubt on additional increases to California’s statewide minimum wage. As we have discussed before, the Governor’s budget is a political document, so it’s not entirely surprising that the Administration would use its proposed spending plan to voice concerns about additional increases to the statewide minimum wage. Unfortunately, the Administration uses some dubious math to bolster its case.

The Administration focuses on the public costs of a higher minimum wage as the primary reason for their concerns about additional increases to the statewide minimum wage. The Administration estimates that the $10 minimum wage, which just took effect on January 1, will cost the state $250 million annually, and that a $15 minimum wage would cost the state $4 billion annually. These costs are due in large part to higher payroll costs for state programs such as In-Home Supportive Services (IHSS). While these cost estimates might at first blush look scary, they should be taken with a huge grain of salt.

Published estimates of the total public cost of a higher minimum wage vary widely. For example, researchers at UC Berkeley’s Institute for Research on Labor and Employment have found that a higher minimum wage benefits the state budget taking higher tax revenue and reduced participation in Medi-Cal and other public programs into account. Why the disparity? One reason is because of the different assumptions about a higher minimum wage’s financial impact on working families, on businesses, and on the overall economy. When the nonpartisan Legislative Analyst’s Office analyzed the fiscal impact of a $15 statewide minimum wage, it estimated that the annual impact on state revenues could range from a loss of hundreds of millions to a gain of more than a $1 billion. This huge range is just one illustration of how uncertain the fiscal impact is, and why such estimates should be viewed with caution.

Moreover, focusing narrowly on whether or not a higher minimum wage costs the state money misses other important reasons to support a higher minimum wage. While we would not argue that a higher minimum wage is “free”, there are certainly other benefits to consider. Would a higher minimum wage help working families make ends meet? Would it help offset the generation of eroding wages for low-wage workers? Judged against the scope of the challenges facing low-income families, a higher minimum wage — like any policy effort to improve economic outcomes for working families — seems like a reasonable approach and worth spending some money on.

— Luke Reidenbach