This measure would increase the minimum hourly wage paid by employers to employees working in all industries in California to $5.00 per hour beginning March 1, 1997, and to $5.75 per hour beginning March 1, 1998.
At the time this analysis was prepared (early August), California's minimum wage was equal to the federal rate of $4.25 per hour. However, the U.S. Congress had just passed legislation which would raise the federal minimum wage in two steps--to $4.75 per hour this year and to $5.15 per hour next year. If the President signs this minimum wage increase into law, California's minimum wage would automatically rise to the new federal rate. In this event, the net effect of this initiative when fully implemented in March 1998 would be to increase California's minimum wage from the new federal standard of $5.15 per hour up to $5.75 per hour.
Both state and federal law require that employers pay their workers a minimum hourly wage. Minimum wage standards were first enacted in California in 1916 and at the federal level in 1938 for the stated purpose of providing an adequate living standard. At present, state and federal laws are similar in terms of their scope and coverage. Where there are differences, employers usually must conform to the law providing the higher wage and broader coverage.
As of mid-1996, California and 38 other states had a minimum wage equal to the federal minimum wage of $4.25 per hour. Eleven states had rates higher than the federal level, ranging from $4.27 to $5.25 per hour.
When this analysis was prepared, both the U.S. Senate and House of Representatives had passed legislation which would raise the federal minimum wage in two steps--to $4.75 per hour this year and to $5.15 per hour next year. If the U.S. Congress reaches final agreement and this minimum wage increase is signed into law, California's minimum wage would automatically rise to the new federal rate. In this event, the net effect of this initiative when fully implemented in March 1998 would be to increase California's minimum wage from the new federal standard of $5.15 per hour up to $5.75 per hour.
Who Is Covered by the Minimum Wage? The categories of workers in California covered by the minimum wage have increased over the years so that most employees are now subject to the law. Some exceptions are actors and actresses, personal attendants (such as baby-sitters), and employers' family members. Our analysis assumes that the proposal would have no impact on who is covered by the minimum wage in California. However, depending on how the initiative is implemented, more or fewer employees could be covered by the measure than under existing law.
Characteristics of Minimum Wage Workers. Approximately 2 million of California's nearly 13 million workers earn less than $5.75 per hour.Most of these workers would be directly affected by this measure. Roughly one-fourth of those earning less than the proposed $5.75 minimum wage are teenagers, while the remaining three-fourths are adults age 20 and over. Industries employing significant numbers of these workers include retail stores, child care facilities, restaurants, fast food franchises, clothing manufacturers, and nursing facilities.
Past Changes in California's Minimum Wage. The minimum wage in California has increased nine times in the past 30 years--rising from $1.30 per hour in the mid-1960s to $4.25 per hour as of July 1996. The increases have been less than the rate of inflation during this period.
How the Minimum Wage Can Be Changed. California's minimum wage increases have usually occurred in one of two ways. The first is a change in the federal minimum wage, which as discussed above, results in an increase in California's minimum wage to the new higher federal level. The second is a state administrative process. Under this process, the California Industrial Welfare Commission can, by a majority vote of its members, issue ''wage orders" to raise the state minimum wage for workers in any occupation, trade, or industry. The commission considers information from business, labor, and the public through a series of hearings. This process was last used by the commission in 1988, when it increased the minimum wage from $3.35 per hour to $4.25 per hour. This measure would require the Industrial Welfare Commission to issue minimum wage orders consistent with the proposed minimum wage increase.
Effects on the Economy
Much of the fiscal impact of this measure would be related to its various effects on the economy, including changes in employment, prices, and profits. For example:
In our view, an increase in the minimum wage would result in some decline in employment and business activity in California relative to what would otherwise have occurred. (If the federal minimum wage is increased, the economic effects attributable to this initiative would be less.)
Effects on State and Local Revenues
The measure would have varying impacts on state and local revenues. For instance, a reduction in business activity, employment, and income in California would result in lower income tax revenues. These declines could be offset, however, by increased spending on goods subject to the sales tax. Higher sales taxes would occur if businesses raised prices of taxed goods in response to the increase in the minimum wage, and this increase is not offset by reduced quantities of goods sold. Sales taxes could also increase if those receiving the higher minimum wage spent a relatively high portion of their new earnings on goods subject to the sales tax.
The net impact on state and local revenues is unknown.
Effects on State and Local Costs
The effects of this measure on state and local costs would depend on whether the federal minimum wage increase is enacted. The costs and savings identified below are based on a comparison between the proposed $5.75 per hour rate and the $4.25 per hour rate in effect in July 1996. If the federal minimum wage is raised to $5.15 per hour, the effects attributable to this measure would be about 40 percent of these amounts.
Costs for Private Service Providers. State and local governments provide various public services--primarily in the health and welfare area--that use low-wage, private sector employees. The increase in the minimum wage would directly raise these costs in three specific areas by a combined total of approximately $225 million.
Costs for Governmental Employees. The increases in the minimum wage would directly increase costs to state and local governments for those employees who earn less than the proposed minimum wage. There are relatively few public sector employees in this category. We estimate that added costs for these employees would be less than $15 million annually.
Other Costs. The higher minimum wage would have a variety of other, more indirect, effects on state and local government costs. For instance, a minimum wage increase would result in higher wages for some workers earning above the new higher minimum wage. This would result in additional costs--potentially in the tens of millions of dollars. Likewise, any increase in inflation resulting from the initiative (to the extent businesses ''pass along" the higher minimum wage costs to consumers) would result in added public costs. The magnitude of these costs is unknown.
Public Sector Savings. Families with limited income currently qualify for public assistance in California, with benefit levels generally being phased out as a recipient's income rises. By raising the earnings of some public assistance recipients, this measure would result in reduced state costs. These savings, primarily in the Medi-Cal and Aid to Families with Dependent Children (AFDC) programs, would likely be in the tens of millions of dollars annually. On the other hand, the measure's impact on business activity would increase public assistance payments to some people who lose their jobs. These costs would partially offset the public assistance savings noted above.