Minimum Wages


It sounds simple raise the minimum wage, reward hard work, and strike a
blow against the society\'s inequalities. It\'s an emotional argument that blurs
out the truth and make\'s people forget one important economic lesson: There\'s no
such thing as a free lunch. The minimum wage has not been increased since the
industrial welfare commission raised it to $4.25 an hour. The IWC and the
legislature have not agreed since that time that any additional increase is
justified because of California\'s recession and the downward turn in the
business climate. There was a measure out on this last ballot called prop 210
which passed and increased the minimum wage from $4.25 an hour to $4.75 an hour
and on March 1, 1997 it will raise to $5.00 an hour and beginning March 1, 1998
it will increase to $5.75. The minimum wage in California has increased nine
times in the past thirty years rising from $1.30 per hour in the mid 1960\'s to
$4.25 per hour as of July 1996. The increase has been less than the rate of
inflation during this period.
The vast majority of the 22,000 members of the American Economic
Association agree that increasing the minimum wage will increase unemployment
among young, unskilled workers. This 35% hike in the minimum wage paid by the
business will be one of the biggest increases in California history. And, it
will hit just when the state is recovering from a long recession. 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 increase. Roughly
one-forth 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, and fast food franchise. Much of the fiscal
impacts 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 activities. 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 cost of higher wages to the consumer by rasing prices of the
goods and services they sell. Alternatively, some employers may offset the cost
of the increase in wages by automating, hiring fewer employees, reducing the
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 my 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. This increase would have varying effect 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 tax would occur if business raised prices of taxed goods in
response to the increase in the minimum wage, and this increase is not offset by
reducing quantities of goods sold. Sales tax 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.
How the minimum wage should be changed, in California minimum wages
increases have usually occurred in one of two ways. The first is a change in the
federal minimum wage, which results in an increase in California 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