Summary
California Proposition 32 would amend the state’s existing minimum wage statute by increasing the minimum hourly compensation that an employer can legally pay to an employee. In 2016, California lawmakers passed Senate Bill 3, which increased the minimum wage statewide on an incremental annual basis from $10.50 per hour until it reached $15. These incremental increases were accelerated for businesses that had more than 25 employees so that these businesses would face a minimum wage of $15 an hour by January 2022, while those with fewer employees would not face a $15 minimum wage until January 2023. Thereafter, the existing minimum wage for all businesses would increase annually at the rate of inflation. As a result, California’s minimum wage for 2024 is $16 an hour.
Prop. 32 would effectively continue the annual increases that resulted from Senate Bill 3 through 2026. Businesses with more than 25 employees would face an $18 minimum wage by January 2025 and smaller businesses would do so by January 2026. Thereafter, the minimum wage would continue to be adjusted upward each year at the rate of inflation.
Fiscal Impact
Legislative analysts attempted to assess the prospective fiscal impact on state and local governments of Prop. 32 and concluded it would result in an “unclear change in annual state and local tax revenues, likely between a loss of a couple billion dollars and a gain of a few hundred million dollars.” It would also result in an “increase in annual state and local government costs likely between half a billion dollars and a few billion dollars.”
Proponents’ Arguments
Joe Sanberg, an anti-poverty activist and entrepreneur from Los Angeles, filed the initiative and has bankrolled Working Hero Action for the Living Wage Act, a political action committee campaigning to advance Prop. 32. He told the Sacramento Bee:
The time is now [to raise the minimum wage], because the pandemic has heightened the people’s understanding of the realities so many Californians face. Cost of living is rising faster and faster…but wages haven’t increased commensurately.
Sandberg also indicated he believes the minimum should be closer to $24 per hour, but that he doesn’t believe voters would support such an aggressive hike. “This is an issue that speaks to people’s every day lives,” he said, “It’s easy to explain and easy to understand and I expect we’re going to win.”
Opponents’ Arguments
Jot Condie, president of the California Restaurant Association, and Jennifer Barrera, president of the California Chamber of Commerce, wrote the official arguments against Prop. 32 in the California ballot guide. They argue that Prop. 32 would worsen the state budget deficit as depressed corporate earnings negatively affect income tax revenues, would increase prices for consumers as higher labor costs are built into the price of goods, would hurt small businesses with lower margins or geographical diversity, and would result in fewer available jobs.
Discussion
Standard economic theory indicates that as the price of anything increases, the quantity demanded will decrease. In terms of labor, this means that prospective employers will seek to employ fewer workers as the price they must pay for those workers rises.
In theory, wages are primarily a function of productivity and so minimum wage laws tend to most strongly affect the labor market for workers with limited skills or experience, such as those seeking entry-level jobs. Empirical evidence confirms this is true. The Federal Bureau of Labor Statistics publishes data about the characteristics of minimum wage workers every year. Its latest release, summarizing data from 2023, shows that 3% of employed teenagers are minimum-wage earners while only 1% of workers over the age of 25 are minimum-wage earners. Workers without a high school diploma are also twice as likely to be minimum-wage earners. Similarly, part-time workers are twice as likely as full-time workers to be minimum-wage earners. Although these federal data assess the characteristics of workers earning the federal minimum wage, which is lower than many states require, it demonstrates that the effect of minimum wage laws is concentrated at the entry-level. To the extent minimum wage laws reduce employer demand for labor, relatively unskilled or inexperienced workers are more likely than skilled and experienced workers to experience unemployment.
There are two main caveats to this reasoning. First, if almost all entry-level workers are being paid more than the minimum wage, then a minimum wage law will not affect employment levels. For instance, in 2016 when California’s minimum wage was still $10.50 per hour the average California worker in a food preparation or serving-related position earned $13.59 per hour and the average sales clerk made $20.91 per hour, according to federal data. Although these occupations are commonly entry-level and associated with minimum wage laws, the proposed minimum wage in Measure 1 is unlikely to strongly affect market outcomes.
Second, the relationship between the minimum wage and employment offerings may be affected by the cost or availability of different production techniques. For example, if machinery like a computerized sales kiosk is available at a lower cost than a minimum wage worker, businesses are more likely to substitute machinery for human workers, which would result in fewer job offerings. By contrast, if labor cannot be easily substituted for machinery, then employers may be compelled to retain human workers and offset the additional wage cost through some combination of higher prices charged to consumers or reduced corporate earnings. As economists at the Federal Reserve Bank of St. Louis concluded in 2021: “A higher minimum wage can also result in employers using automation to replace more expensive human labor.”
The evidence on how minimum wages affect workers is clear:
- Some workers get a pay increase.
- Many teenage and young adult workers see their jobs cut. Despite the individual studies supporters will point to showing no job cuts, there are vastly more studies that find job reductions from minimum wage hikes.
- Many more workers see their hours cut.
- Other workers have benefits cut, especially healthcare.
For certain industries, California already enforces a higher minimum wage than what is proposed in Prop. 32. In late 2023, California lawmakers approved Assembly Bill 1228, which increases the minimum wage for fast food workers to $20 per hour. Around the same time, lawmakers also approved Senate Bills 159 and 525, which together increased the minimum wage for health care workers to between $18 and $23 per hour depending on what type of facility they work in. Prop. 32 would therefore not affect employees in these industries. However, early anecdotal evidence reveals that fast food prices have increased and job openings have decreased in response to the minimum wage hike. Federal data show that average hourly earnings for California fast food workers were $16.91 before the hike, which means the new wage floor is about 18% higher than the market-clearing rate.
Despite evidence showing that minimum wage laws tend to reduce employment opportunities for entry-level workers or result in higher consumer prices that negate the purchasing power of nominally higher wages, minimum wage laws have been popular at the ballot box. Between 1996 and 2022, 28 ballot initiatives appeared across the country proposing higher minimum wages, and 26 of those were approved by voters. Nevada and Nebraska were the most recent states to raise minimum wages through ballot initiatives in 2022. As of 2024, Washington State has the highest minimum wage at $16.28 per hour while California comes in second at $16.00 per hour.