California’s plan to raise its minimum wage to $15 an hour by 2022 — higher than any other state in the union — would put the state in uncharted territory, carrying both hope and danger for workers in the nation’s largest economy.
Gov. Jerry Brown announced the deal with state lawmakers Monday. Under the agreement, California’s minimum wage, now $10 an hour, would climb gradually over six years.
The deal came together quickly, under duress: A pending ballot initiative threatened to raise the wage more swiftly if politicians didn’t act. The state legislature still has to vote on the plan.
Boosting the minimum to $15 would put California well above the inflation-adjusted peak for the federal minimum wage, which occurred in the 1960s. The effects are difficult to predict, many economists say, because there is little historical precedent for raising minimum wages so high on such a wide scale. By 2018, California’s minimum wage would be higher than the rate is now in France and Australia, which the Organization for Economic Cooperation and Development says had the world’s highest wage floors in 2015.
“Just as the benefits of a minimum wage increase rise with a big increase, the risk of negative costs rises as well,” said Ben Zipperer, a labor economist at the Washington Center for Equitable Growth, a liberal think tank. Particularly in lower-wage parts of the state, he said, “we don’t know what the answer will be” on how many jobs might be eliminated when the minimum goes up.
Supporters say the move will reduce poverty and help struggling families in a state with some of America’s most dramatic income inequality. A “living wage” for a single adult with no children in California is about $12 an hour, according to calculations by Amy Glasmeier of the Massachusetts Institute of Technology.
More than 2 million minimum-wage workers in California would see their incomes increase in the first year of the deal, according to a fact sheet lawmakers released Monday. Without adjusting for inflation — and assuming they keep their jobs — those workers would see a 50 percent increase in their pay by 2022, to $31,200 a year.
If the increases boost economic activity through increased consumer spending, as some liberals hope, activists across the country could gain in their efforts to raise minimum wages in other states and cities.
“Working our way up to $15 an hour will allow me to place extra dollars in areas where I fall short or have to borrow money from my elderly father or somebody else in order to keep things going,” Valdez Anderson, who works at a heating and air-conditioning company in Sacramento, said on a media call set up by labor unions. “A gradual increase would also allow me to put money away for my daughter’s graduation, which is coming in the near future.”
But opponents say the rapid wage increase will push companies to leave the state or lay off workers en masse.
Local governments and school districts could feel a budget pinch, particularly in lower-cost, lower-wage areas such as the state’s Central Valley, if new residents — from other states and even other countries — flock to California in search of the highest-paying low-skilled work in the world.
“The risk,” said Edward Leamer, an economist who is the director of the UCLA Anderson Forecast, “is that we’re going to be attracting workers and repelling jobs.”
On top of that, opponents say, the wage increase will raise prices for consumers, including the poor and the middle class.
“If you’re a business person and you look at this, your first thought is these people are crazy,” said Bill Dombrowski, president and chief executive of the California Retailers Association. “Reporters find some innocent people saying, ‘This is going to be so good for me, I’m going to make so much more money,’ and six months from now they’re out of a job. It just makes me sick.”
Many recent studies of the minimum wage, often conducted by comparing differences across state and county lines, have found little evidence that raising the floor causes large job losses. (One notable exception was a 2014 University of California at San Diego paper that found minimum wage hikes in the 2000s caused “significant” harm to jobs and incomes.)
Many of the industries most affected by minimum wage increases are those that can’t move far from customers, including restaurants and brick-and-mortar retailers.
However, there are some industries in California that might respond more radically. Parts of Los Angeles’s garment industry, for example, might take the opportunity to move out of state — although there’s a trade-off if that puts them farther from their end markets. The same is true of
the large warehouses where e-commerce companies such as Amazon package and ship goods; they could move across state lines to save on labor but would have to pay more for transportation.
“I would expect Amazon to be less likely to move since it is very time-sensitive and meeting those requirements from longer distances is likely to be expensive,” says Dale Belman, a professor at Michigan State University who co-authored a book on the minimum wage. “Other centers may be more able to move if they don’t guarantee fast shipping.”
Adam Ozimek, an economist at Moody’s Analytics, calculates that 600,000 California manufacturing jobs currently pay $15 an hour or less. He says 31,000 and 160,000 of them could be lost under the proposed agreement, depending on how responsive companies are to cost increases.
California’s plan would give the governor the power to delay an increase if state job growth turns negative for a period of months or if retail sales fall over the course of a year.
The ballot measure planned for this fall would have included a similar wage increase but no safety valves tied to economic conditions.
Placing it on the ballot was the biggest victory yet for the “Fight for 15” movement, which began with worker protests in New York state and has spread to cities and states across the country.
The group’s appeals for a federal minimum wage hike have fallen short in the Republican-controlled Congress.
Still, in California, economists would have the ingredients for a massive natural experiment in how markets respond when government forces employers to pay their workers more. It will test the pillars of the “middle-out” theories that have come to dominate the policy thinking of leading Democrats, including President Obama and the two candidates for the party’s 2016 presidential nomination, Sen. Bernie Sanders and former secretary of state Hillary Clinton. Sanders has called for the national minimum wage, now $7.25 an hour, to be raised to $15 by 2020.
If California starts shedding jobs to other states, its representatives in Washington will likely step up efforts to raise the federal wage. Brown, the governor, hinted at that in a news conference Monday.
“It is quite incredible that you have so much wealth, and so many people struggling on $10 an hour, and people out there in the rest of the world getting $7.25, and you’ve got a Congress that doesn’t get it, that’s so out to lunch [that] much less $15, they can’t get to $7.50,” he said. “I hope that what’s in California doesn’t stay in California but spreads all across the country.”