Summary of Fiscal Effects
The 2015-16 Governor’s Budget recognizes nearly $200 million in annual state costs related to the minimum wage increase passed in 2013. We estimate that a further increase to $13 per hour would boost costs and cost pressures by an additional $340 million to $430 million in 2015-16 (half year effect), and $680 million to $860 million in 2016-17 (full year effect) and thereafter. The key components of the 2016-17 full-year estimate are:
- Increased state payments for providers of In-Home Supportive Services (IHSS) of $340 million to $520 million, depending on how added wage costs are split between the state and counties.
- Increased state costs to the Department of Developmental Services (DDS) of $260 million for purchases of services from community care facilities and other providers.
- Increased cost pressures related to childcare and state preschool programs totaling $50 million.
- Increased costs for low wage (mostly part time and seasonal) state employees totaling about $30 million. Additional cost pressures, potentially in the high tens of millions of dollars, due to wage compaction.
Employers are subject to federal and state minimum wage laws. California, along with 28 other states and the District of Columbia, currently has a minimum wage that exceeds the $7.25 per hour federal standard. Most employees are covered by California’s $9.00 per hour minimum wage – the key exceptions being those who are self-employed, professional and managerial workers, outside salespersons, immediate family members of employers, and apprentices.
Over the past 13 years, California’s minimum wage has increased four times – from $6.25 per hour to $6.75 per hour in January 2002, to $7.50 per hour in January 2007, to $8.00 per hour in January 2008, and to $9.00 per hour in July 2014. It is scheduled to increase further to $10.00 per hour beginning January 2016.
Impacts on State Government
A further increase in the minimum wage to $13.00 per hour effective January 1, 2016 would produce substantial costs and cost-pressures to California state government. These costs are displayed in Figure 1.
Impact of a $13 Minimum Wage On State Costs
a\About three-quarters of the state childcare and preschool costs would accrue to Non-Proposition 98 programs and the remainder would accrue to Proposition 98.
In Home Supportive Services (IHSS) Provider Wages
The IHSS program provides supportive services (housecleaning, meal preparation, laundry, grocery shopping, and personal care) to individuals that are over 65, disabled, or blind, and have met Medi-Cal eligibility criteria. The program is considered an alternative to more expensive care facilities and other out-of-home settings. Under current law, wages and benefit payments to IHSS providers are split between the federal government (54 percent), state government (65 percent of the non-federal share, or about 30 percent) and counties (35 percent of the non-federal share, or about 16 percent).
Currently 32 counties pay IHSS workers less than $10.00 per hour, and thus would experience the full impact of the $3.00 minimum wage increase. An additional 14 counties pay between $10.00 and $11.50 per hour, and 12 pay between $11.50 and $13.00. No county currently pays more than the proposed $13.00 minimum wage.
We estimate that an increase in the minimum wage to $13.00 per hour would result in increased IHSS wage costs of about $1.1 billion in 2016-17. The federal government would be responsible for about $610 million of the total, and the state’s share would range from $340 million to $520 million, depending how the non-federal costs were split between the state and counties.
Specifically, the total would be $340 million if the state covered its normal 65 percent of non-federal costs. The remaining 35 percent ($180 million) of the non-federal share would covered by counties. However, if the state were to pick up the full non-federal share of the provider wages (as is the currently the case with respect to the AB 10 related minimum wage increases), its costs would be $520 million.
DDS Local Assistance
The Department of Developmental Services (DDS) provides services and support to individuals with developmental disabilities. The services are coordinated through 21 non-profit regional centers. We estimate that these regional centers would face cost pressures of about $450 million in 2016-17 related to purchases of services from community care facilities, as well as providers of day programs, transportation, and other services. Of the total, $260 million would be funded from the state General Fund and the remainder from federal funds. It is possible that cost pressures could be mitigated to some degree through efficiencies, funding reallocations, or service reductions. However, we note that the current DDS budget includes over $100 million in annual state costs related to the much smaller AB 10 minimum wage increases.
The state provides about $1.8 billion in childcare subsidies to working families through CalWORKS and other social services programs (supported by a combination of federal and state General Funds) plus about $700 million through the state pre-school program (funded from within Proposition 98). These subsidies are provided through vouchers or through contracts with childcare providers. Under current law, a minimum wage increase would not directly increase state childcare payments. However, they would significantly increase child care costs faced by low-income working families, and thus put considerable pressure on the state to increase contract rates or voucher amounts. We estimate the resulting state cost pressures would be at least $50 million per year,
State Employee Costs
We estimate that less than 10,000 state employees – mostly part time and seasonal workers – earn less than $13 per hour. We estimate that an increase in the minimum wage to $13 per hour minimum wage would raise state costs for these employees by approximately $30 million in 2016-17.
The estimates in Figure 1 are largely confined to wage increases received by workers that currently earn less than the proposed $13.00 per hour minimum wage. However, a minimum wage increase of this magnitude would result in “wage compaction” throughout the lower end of the wage spectrum. After the 30 percent increase in the minimum wage, many employers will face pressure to maintain pay differentials between their entry-level workers and those having more experience and/or skill levels. These adjustments would produce significant additional cost pressures to state government, potentially in the high tens of millions of dollars per year.
Other Costs and Savings
The bill would have a variety of other impacts on state revenues and costs. Regarding revenues, the higher minimum wage would boost pay of most minimum wage workers, thereby raising personal income and sales taxes paid by these individuals. However, these increases would be offset by a decline in business profits that would occur because of higher labor costs. The net effect would depend on a variety of factors, including the extent to which businesses are able to offset higher labor costs through efficiencies and higher product prices, and the degree to which businesses reduce employment of less-skilled workers. Overall, we believe the net effect would be a revenue loss mainly because, under California’s progressive personal income tax system, the effective tax rate on the new income for minimum wage workers will be lower than the rate that would have applied to the same income, had it remained with corporations and business owners
Regarding state costs, the higher minimum wage would have mixed effects. Some individuals receiving CalWORKs payments and working at minimum wage jobs would experience an increase in earned income, which could result in the phase-out of their assistance payments. However, these savings would be partly or completely offset by the reduction in jobs available for less-skilled and inexperienced workers. The fewer jobs would translate into caseload-related cost increases in CalWORKS, Medi-Cal, and related health services programs. It would also raise unemployment insurance payments.
Comparison to Previous Estimates
Our estimate is significantly higher than recent legislative committee estimates of minimum wage increases, which have focused solely on state employee and administrative costs, and have not included costs associated with IHSS, childcare, and community service providers. As one example, the bill analyses of AB 10 identified state costs of just $17 million from all funds, with the majority related to wage increases for seasonal workers. It should be noted that actual costs have been dramatically higher. The 2015-16 budget identifies over $200 million costs in DDS and IHSS programs that are attributable to the AB 10 minimum wage increase.
However, our cost estimate is generally consistent with fiscal estimates prepared by the Legislative Analyst’s Office (LAO) in early 2014 for a proposed ballot initiative that would have raised the minimum wage to $12.00 per hour. The LAO estimated that the minimum wage increase would boost combined state costs for IHSS, DDS, and state employees by the “high hundreds of millions dollars annually.” It also stated that the minimum wage increase would have uncertain net effects on state revenues and CalWORKs spending (though did note that the potential for a decrease in CalWORKS spending was greater than the potential for an increase.)
Our review indicates that an increase in the minimum wage to $13 per hour would result in substantial state costs and cost-pressures, potentially exceeding $850 million annually. This estimate represents just the direct impacts of the proposed minimum wage increase, and does not consider the broader range of effects that a second major minimum wage increase within a few years would have on the California economy. A clear majority of academic studies prepared over the past two decades find negative job effects associated with minimum wage increases, particularly for young, less experienced, and less-skilled employees. Any slowdown in economic growth would have further feedback effects on state government revenues and expenditures.
 See, for example, Minimum Wages, by David Neumark, University of California, Irvine, and William Wascher, Federal Reserve Board (MIT Press, Cambridge, MA, 2008). The authors reviewed and evaluated research conducted over the prior two decades on minimum wage effects, andconcludedthat “... [M]inimum wages reduce employment opportunities for less-skilled workers, especially those who are most directly affected by the minimum wage.”