By Justin Fox / Bloomberg Opinion ·
Among the 10 ballot proposals that Californians will vote on next week is one that would raise the state’s minimum hourly wage at employers with more than 25 employees to $17 immediately — which would be the highest state minimum in the U.S. — and $18 in January, with annual inflation adjustments after that. The minimum wage for smaller employers would rise to $17 in January and $18 in 2026. (Washington state has the current highest minimum wage at $16.28 per hour, increasing to $16.66 as of Jan. 1, 2025.)
This would not constitute what you could call a radical change for California, whose minimum wage is already $16 an hour with annual cost-of-living increases, and many coastal communities have higher minimums. What’s more, the state added a $20 minimum wage for fast-food chains with more than 60 outlets that don’t happen to be Panera Bread in April and imposed a $23 minimum wage on very large health-care employers on Oct. 16. Though support for Proposition 32 appears to be fading, meaning some of the calculations below could prove academic, it still seems timely to explore the possible consequences of the state’s minimum wage campaign of the past decade or so.
A quarter century ago, the consensus among economists was that raising minimum wages destroyed jobs as employers figured out ways to do without suddenly more-expensive workers. Since then, a flood of empirical studies — summed up nicely in the forthcoming Handbook of Labor Economics by Arindrajit Dube of the University of Massachusetts Amherst and Attila S. Lindner of University College London — have shown job losses after most minimum-wage increases to be modest to nonexistent and the benefits for lower-income workers great. Minimum wage increases seem to represent, according to this new consensus, the supposedly nonexistent free lunch.
Even the enthusiasts among economists still believe, though, that at some level of minimum wage the lunch starts to get expensive. How high is too high? It’s a good question, and it hasn’t really been answered. Future research, Dube and Lindner wrote near the end of their review, “should focus on determining the appropriate levels of the minimum wage, rather than debating the existence of the policy itself.”
Whatever that appropriate level turns out to be, California is a lot closer to reaching or exceeding it than it was a decade or two ago.
The ratio of the minimum wage to the median wage — often referred to as the Kaitz Index, for former U.S. Bureau of Labor Statistics economist Hyman Kaitz — is the most-used measure of what economists call the “bindingness” of the minimum wage. The higher the ratio, the greater number of workers directly affected by the minimum. California’s statewide minimum wage has clearly become much more binding over the past two decades, going from 41.2 percent of the median in 2006 to 62.7 percent in 2022, meaning that it is directly raising the hourly wages of more workers but also presumably giving employers more incentive to look for workarounds.
At the federal level, things have been headed in the opposite direction. The current $7.25 federal minimum is just 23.9 percent of this September’s average wage, and 31.4 percent of the May 2023 median wage.
U.S. wages vary by geography, with 2023 state medians ranging from $29.18 in Massachusetts to $18.03 in Mississippi. But even in Mississippi, the current federal minimum isn’t really binding. It is 40 percent of the median wage, and well below the state’s 10th percentile wage — the wage that 10 percent of workers in the state earn less than — of $10.33.
Wages vary by geography within California, too. Among metropolitan areas, San Jose-Sunnyvale’s $39.17 median wage in 2023 was the nation’s highest, while the majority of the state’s metropolitan areas have median wages below the national median.
To me, this is an argument for localized minimum wage-setting. The highest local minimum wage in California is $19.36 in Emeryville, across the bay from San Francisco. That’s 55.9 percent of the 2023 San Francisco-Oakland metro area median and below the area’s 25th percentage wage. An $18 statewide minimum wage, meanwhile, would be more than 80 percent of the 2023 median in seven of the state’s metropolitan areas and above the 25th percentile wage in 19 of them.
Again, that means it would raise the wages of a larger share of workers in those places but be likelier to cause job losses. Also, Dube and Lindner report that studies of low-wage sectors consistently show a “clear and sizable increase in output prices following minimum wage increases,” which seems like a fairer trade-off in high-income coastal areas where most people can afford to spend a few more dollars on lunch than in much-poorer inland ones.
Then there’s the fast-food-chain minimum of $20, which is a whopping 118 percent of the $16.91 May 2023 median hourly wage for “fast food and counter workers” in California. Before it was imposed in April, employment had grown faster at limited-service restaurants in California since the start of pandemic than nationwide. Since then, not so much.
The modest change since April doesn’t prove anything, and economists will be using more sophisticated techniques to suss out the impact of California’s recent and possible future minimum-wage increases. One of these days, they may even figure out how high is too high.
Justin Fox is a Bloomberg Opinion columnist covering business, economics and other topics involving charts. A former editorial director of the Harvard Business Review, he is author of “The Myth of the Rational Market.” More stories like this are available on bloomberg.com/opinion ©2024 Bloomberg L.P.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
