Ten Dollars or Thirteen Dollars?

Comparing the Effects of State Minimum Wage Increases in California

In September of 2013, California Governor Jerry Brown signed Assembly Bill 10 into law. AB10 increases California’s minimum wage—which has stood at $8 per hour since 2008—to $9 on July 1, 2014, and to $10 on January 1, 2016. Some policymakers regard the modest increase provided by AB10 and the absence of annual adjustments for price increases as insufficient for the wellbeing of the Golden State’s lowest-paid workers. Indeed, for the first time in the state’s history a new minimum wage proposal—Senate Bill 935 sponsored by Senator Mark Leno—has been introduced in the legislature before the implementation of the already-legislated minimum wage increase (AB10). Senator Leno’s bill would increase California’s wage floor in several steps to reach $13 in January 2017, and annual cost of living adjustments would begin in 2018.

California is not alone in implementing or considering minimum wage increases this year. Thus far in 2014 thirty eight states have considered minimum wage bills and eight states and Washington, DC have enacted new increases (NCSL 2014). Some states and cities have already enacted minimum wage standards that exceed $10. A number of California cities are currently contemplating citywide increases: $15 in San Francisco, $13 in Richmond, $12.53 in Berkeley, $12.50 in Oakland, and $11.50 in San Diego.

While minimum wages of $10 to $15 are appearing for the first time in the U.S., when adjusted for inflation or compared to median wages they are not outside of previous experience (Dube 2014). The $10 minimum wage of AB10 represents just under 50 percent of the median full-time wage in California— less than the 55 percent ratio that held in the U.S. as a whole in the late 1960s, and about the same percentage as in European countries with a statutory minimum wage today. A fully implemented SB935 would be only modestly higher than the federal minimum wage in 1968. Its ratio to the median wage would be 58 percent, less than the ratio in many U.S. states in the 1960s and well below the equivalent percentage in the Nordic countries today. Nonetheless, it is important to ask: What are the implications of such double-digit minimum wages in California today?

In this report we compare the effects of $10 (AB10) and $13 (SB935) minimum wage levels in California. We show that AB10 restores some of the ground lost by low-paid workers in recent years, but it maintains the inflation-adjusted minimum wage at about the same level as in 1988. The Leno bill, SB935, goes much further, raising the real minimum wage to just above the peak value obtained in 1968. Between 2014 and 2017, the aggregate increase in earnings accrued by affected workers will total about $8.2 billion for the $10 minimum wage bill and $22.5 billion for the $13 minimum wage proposal. We also analyze the effects of each minimum wage scenario on California’s businesses and on California’s state budget.

We find that California’s businesses are likely to absorb the increased labor costs of either minimum wage largely with offsets from increased worker productivity, from declines in recruitment and retention costs, and with small price increases in the restaurant industry (the industry most affected by minimum wage increases).

Unlike previous minimum wage impact studies, we pay particular attention to the effects of each minimum wage proposal on the state’s budget. Increased wage income will generate substantial income andsales tax revenue for California during 2014-17: approximately $444 million under AB10 and $2.62 billion under SB935. On the spending side, Medi-Cal costs will fall by about $562 million under AB10 and $1.54 billion under SB935, while increased wage costs for state-supported home care workers and developmentally disabled service workers will total about $400 million (AB10) and $2.04 billion (SB935). Increased revenues less increased outlays will total about $585 million (AB10) and $2.15 billion (SB935).

The report proceeds as follows. In Section 1 we document trends in the distribution of wages in California since 1979, present the history of the state’s minimum wage, and illustrate its importance to the state’s lowest-paid workers. In Section 2 we discuss the effects of AB10 and the proposed SB935 on workers in the state, and analyze each proposal’s impact by demographic group and family status. Section 3 examines the cost impacts on businesses and discusses how businesses are likely to absorb these costs. Section 4 discusses how each of the two minimum wage paths will affect the state’s economy and the state’s budget. Here we address state tax revenue increases, savings in state Medicaid costs, and increased wage costs to California for developmentally disabled and in-home care support service workers. Section 5 concludes.