How will an increase from $6.75 to $7.75 in the California minimum wage impact the California economy?

California policymakers are considering raising the state minimum wage for the first time since 2001. The proposed bill regarding the minimum wage would increase the state minimum wage from the current $6.75 per hour to $7.25 per hour effective January 1, 2006 and $7.75 per hour effective January 1, 2007. In addition, the measure would require the state to adjust the minimum wage rate annually—beginning January 1, 2008—based on inflation.

This prospective analysis may help policymakers, employers, employees, and the public understand the potential economic implications of an increase in the current California minimum wage from $6.75 to $7.75. Specifically, the study includes the following:

  • an analysis of the current demographic characteristics of California low wage workers,
  • estimates of the costs incurred to establishments of various sizes and in different industries assuming no change in employment, and
  • a discussion of how establishments in industries that face significant cost increases will likely adjust to an increased minimum wage.

The study finds that almost 1.65 million workers in the private sector would be directly affected by the minimum wage increase. These workers are largely employed in the service sector, specifically in the accommodations and food services industry. The average operating cost increase to firms is about 0.7 percent, but most establishments face increases less than half that much with large increases concentrated in a small portion of establishments. The establishments in the accommodations and food services industry face operating cost increases of 2.4 percent on average. Over 98.6 percent of firms would face operating cost increases of less than five percent. It is likely that most establishments will make only minor adjustments, if at all, to compensate for small cost increases. Establishments in the accommodations and food services industry will likely pass through a large portion of the increased costs to consumers by raising prices. Overall, the minimum wage increase should not affect the California economy in a negative way, specifically through loss of employment or business relocation out of California.