PROPOSAL

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.

BACKGROUND

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.

FISCAL IMPACTS

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:

• Most employees earning less than the proposed minimum wage would earn more. They would also spend more on goods and services, thereby generating certain increases in economic activity.
• At the same time, however, employers would face higher wage costs, which they would either absorb in the form of lower profits or attempt to offset through a variety of means. For instance,they may attempt to shift or ''pass along" the costs of the higher wages to consumers by raising prices of the goods and services they sell. Alternatively, some employers may offset the costs of the increase in wages by automating, hiring fewer workers (or reducing workers' hours), or limiting fringe benefits. Some businesses that are not able to shift the effects of the higher minimum wage may reduce economic activity in California. This would most likely occur in industries that have a large share of expenses for low-wage workers or that are subject to competition from other states and other countries.

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.

• In-Home Supportive Services. This program provides services to low-income aged, blind, or disabled persons who are unable to remain safely in their own homes without assistance. In this area, the state would experience added annual costs of about $130 million and counties would experience added costs of about $70 million for wage increases for approximately 170,000 service providers.
• Medi-Cal Nursing Facility Rates. The state would incur added annual costs of approximately $13 million for nursing facility reimbursement rates under the Medi-Cal Program because of the added salary costs for employees. This component of Medi-Cal provides long-term nursing care for certain low-income persons.
• Child Care Programs. Increased state costs for child care programs administered by the Departments of Education and Social Services would total several million dollars annually (probably less than $10 million in total), due to increased wages to care providers.

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.