A Minimum Wage Natural Experiment: Comparing California And New York
California’s recent commitment to raising the statewide minimum wage to $15 per hour by 2021 offers another state-specific approach to increasing low-income wages. In our last blog post, we noted both California and New York had recently passed laws raising their minimum wage to $15 per hour. However, New York calls for different minimum wage levels and implementation by region, while the California Fair Wage Act of 2016 applies to all businesses and does not incorporate tip credit for businesses with tipped employees.*
While their approaches differ, as seen in Table 1, there is remarkable similarity between their statewide wage distributions. The largest difference is at the median, where the New York wage of $20 is $0.85 (4.4%) higher than the median in California. The differences at other percentiles we compare range between $0.22 and $0.49, with the distribution in New York generally but not universally higher.
Table 1: California vs. New York: 2015 Wage Distributions
Also similar to New York, California’s wages vary considerably by region, with California’s Bay area in many ways analogous to the greater New York City area. As seen in Table 2, Bay area wages at the 25th percentile are already at, or reasonably close to, $15 per hour. San Francisco and San Jose are already over $15, San Rafael — immediately up the coast from San Francisco — is at $14.48 and Oakland-Berkeley is at $13.89. Employment in these high-wage regions was 21% of California’s total in 2015.
However, moving further down Table 2, 25th percentile wages drop off sharply. The 25th percentile was $12.62 in Santa Rosa, and between that and $12 for the three next regions. The 25th percentile wage is between $11 and $11.83 for the next thirteen regions, representing 53% of total employment and less than $11 for the remaining eleven regions, accounting for 9% of employment. These regions mirror Upstate New York, where wages were far lower than those in the New York City area.
Although we are doubtful the states’ legislatures and administrations intended to create an optimal experiment testing different approaches to implementing statewide minimum wage increases, they have created a highly useful comparison.
Table 2: Regional Wage Distributions Sorted by 25th Percentile Earnings
To evaluate the expected impact of wage hikes, it’s useful to compare projected minimum wage increases to the effect of inflation on wages in absence of minimum wage changes. California’s law establishes a minimum wage which will rise to $11.00 per hour in 2017 and by $1 annually until it reaches $15 per hour in 2021. After 2021, it will be adjusted every January to reflect changes in the cost of living.
For our analysis, we focus on California’s 10th and 25th percentiles because the state median wage is already well over the planned $15 minimum. The current California minimum wage of $10 per hour is well below the 25th percentile and only slightly above the current 10th percentile. We would not expect the new law to much affect those at the 25th percentile until 2019, when the minimum wage rises to $13 per hour. This is because, allowing for modest wage inflation of 1.5% annually, the inflation-adjusted 25th percentile wage in the absence of the minimum wage would be $12.52. So due to California’s stepped annual increases, each less than 10% of the initial minimum of $10 per hour, the plan will only gradually affect many employees, and in turn, annual cost to employers.
However, the data also shows that California’s minimum wage increase will have greater impact outside of the Bay metro area. With or without the state-instituted wage hike, Bay Area regional wages would remain high, and the 25th percentile wage would be at or above $15. However, outside of this area, the forecast of the 25th percentile wage in the absence of the legislated minimum wage increase is lower — and in most cases substantially lower than $15 per hour — varying from $13.60 down to $10.19.
What’s the effect? Two considerations help us here: the level and pace of minimum wage hikes, and then the very purpose of the minimum wage to begin with.
Although the minimum wage increase to $15 per hour is spread over time and no annual increase exceeds 10% of the current minimum wage, the total increase of 50% places the increase well outside the U.S. range of experience. Because of the magnitude of this increase to $15 per hour, the reassuring empirical finding that moderate increases in the minimum wage do not affect employment is not applicable.
The planned increases cover a far larger proportion of the labor force than other state or federal increases in the recent past. Although the scheduled increases will provide great benefits to California employees, there are particular concerns about the effect on employment in those regions with lower wage distributions, as they will experience the largest overall wage increases.
Of course, one chief purpose of the minimum wage is to raise the earnings of low-wage employees, and a uniform $15 minimum wage assures that the policy will have considerable bite in many California regions.
How many employees will be affected by the $15 minimum wage and how large a bite will it have in California’s labor market?
Table 3 provides estimates of the number of employees affected, arranged by the 2021 forecast of the 25th percentile for each area’s wage distribution (and assuming current values of employment).
Table 3: Employment By 2021 Wage At The 25th Percentile Of The Wage Distribution
Across all regions, nearly 5 million California employees will be affected by the 2021 minimum wage of $15, about one-third of the state’s workforce. Putting aside the category of $15 and above, the 1 million employees in the regions in the $13 to $14.99 hourly wage range will gain between $0.04 and $2.00 per hour, or between $80 and $4,000 for a full time year of 2,000 hours.†
Dropping down to the $12 to $12.99 band, 2.25 million will gain between $2 and $3 per hour, and between $4,000 and $6,000 annually. The 1 million employees in the regions with wages between $11 and $11.99 will gain between $3 and $4 per hour, and between $6,000 and $8,000 annually relative to their earnings absent the minimum wage increase.
Overall, California’s decision to raise the state minimum wage to $15 per hour will benefit many low wage-low income workers. Given the underlying boldness of the proposed change, the law is well structured, as the annual changes are each 10% or less. The increases after 2021 are tied to the consumer price index and will be much smaller than from 2017 to 2021. In essence, the California minimum wage law is an effort to permanently restructure the lower quarter of the California wage distribution.
At the same time, given the magnitude of the increase over the 2017–2021 period, as well as the magnitude of the impact in the lower-wage regions, there is clearly a possibility of employment loss in these regions. This is not necessarily bad — the gains to lower income workers who remain employed will be very large, and the gains from restructuring the low wage economy will be realized over many years. If most of reduction comes in the form of reduced hours rather than loss of employment, the advantages from the increase will be evenly spread and the disadvantage mitigated.
Finally, given New York and California’s fundamentally different approaches to their respective minimum wage laws, the added similarity of the New York and California wage distributions sets up a useful experiment in measuring the effect of a uniform minimum wage against a regionally structured minimum. No doubt, local economic conditions will complicate the comparison over the next five years. However, it should be possible to learn which approach produces better results in terms of earnings, incomes and employment — California’s bold effort at restructuring, or New York’s more nuanced, tailored approach.
*Even in the absence of the increase in the state minimum wage, local minimum wages affecting a large fraction of the state labor force are rising to $15 during this period. Our discussion neglects this.
†All these statements are predicated on the assumption of no loss in either employment or hours, an assumption that few would take as entirely reasonable.
Dale Belman and Paul Wolfson are the authors of “What Does The Minimum Wage Do?”, an academic analysis of more than 200 studies assessing the effects of the minimum wage on employment, wages, incomes, and more.