The following blog post was written by Betsy Baum Block, Henry Gascon, Peter Manzo and Adam Parker, authors of Stuggling to Get By: The Real Cost Measure in California 2015.
On April 4, Governor Jerry Brown signed a bill (SB 3) that will raise California's minimum wage to $15 an hour by 2022. Together, with the passage of a similar law in New York State and living wage campaigns throughout the nation, California’s action has brought the idea of a $15 minimum wage to the forefront of the national discussion on poverty.
The passage of the mimimum wage law provides us an opportunity to view how this one change could affect the lives of Californians struggling to get by. While there are many things about the future we cannot know including housing costs, health care costs, social supports, prices for goods and services and the overall employment picture in 2022, we can use the “what if machine” to consider the hypothetical question: what if the minimum wage had been $15 an hour in 2011-2013, the years upon which we based our report Struggling to Get By: The Real Cost Measure in California 2015? If we assumed all other factors remained stable, how many families would have their circumstances changed by a substantially higher minimum wage?1
According to our calculations, if the minimum wage had been $15 an hour during 2011-2013, more than 350,000 California households could have moved above the Federal Poverty Level (FPL), a reduction of over 30% of the share of households below the FLP for the period studied. This is a significant effect from one policy change.
Unfortunately, the Federal Poverty Level vastly understates the true extent of poverty, so we must also assess the impact of a minimum wage increase against a measure of actual costs of living in different regions and the ability of families in those areas to meet their basic needs. Our report examined economic security in California and introduced a new metric, the Real Cost Measure (RCM) to better understand what households need to meet the cost of basic needs using a "bare bones" budget for food, housing, transportation, health care, child care and taxes. Households meeting the Real Cost Measure household budget may still be one large car repair, medical bill or job loss from catastrophe. Our report found 31% of California households struggle to meet basic needs, with wide variations by region, race and ethnicity, gender, educational attainment and family structure.
Of households earning below the Real Cost Measure, 87% had at least one working adult, so these are overwhelmingly working households. Our report found that 3.2 million California households earned below the Real Cost Measure. The heads of households in 75% of those families earned below $15 an hour, and 1 in 4 of heads of household earned above $15 an hour. The distribution of imputed wages of households is shown in the figure below:
If we were to wave a magic wand and make the $15/hour minimum wage retroactive to 2011-2013, 465,000 households could have had earnings above the Real Cost Measure budget – including nearly 40,000 households that original had earnings below the Federal Poverty Line. Additionally, 318,000 households could have moved above the Federal Poverty Line. Another 2.4 million could see their household income increase.
Overall, a $15 minimum wage could bring the share of California households below the RCM down to as low as 27%, compared to the 31% we found in our study as shown in the figure below. While this is a significant change affecting nearly half a million households, it could leave approximately 2.75 million California households below the Real Cost Measure.
Minimum Wage Increase has Strong Effect on Poverty, But Households Still Struggle
Further, the effects of a higher minimum wage are not uniform. In locations where costs and wages are low, a $15 minimum wage could have a significant impact in bringing households out of poverty. For example, in Tulare County, where 22% of households earned below the FPL and 43% live below the RCM, a $15 minimum wage could have a huge effect on poverty. Not only does the higher wage bring the share of households below the FPL to as low as 14%, it also reduces the percentage of households unable to meet basic needs from 43% to as low as 33%.
In contrast, households in high-cost areas need substantially greater resources to achieve economic security. With housing and other costs so much higher in areas like the Bay Area or Los Angeles, the $15 an hour threshold might have comparatively less effect. In Marin County, for example, only 5% of households are below the federal poverty level, and that number likely drops only a few tenths of a percentage point with the higher wage.
The $15/hour minimum wage is still over 6 years away, and a number of things can happen – indeed, are likely to happen – that would dampen its poverty-reducing impact, such as increases in the costs of housing,2 health care and child care, and changes in the labor market.3
California’s planned $15/hour minimum wage will provide a powerful boost to struggling households. Of 3.2 million California households struggling to get by, 318,000 (10%) will move above the FPL, and 465,000 (14%) will move above the Real Cost Measure of basic needs. But with 2.6 million households still struggling to meet the cost of basic needs, clearly a $15/hour minimum wage is insufficient on its own to bring economic security to most struggling California households.
- This should very much be read as a “back-of-the-envelope” analysis. While we take into effect the changes that the higher wages would have on the Earned Income Tax Credit (EITC), which helps low-income working families, we are not able to model for all of the changes that higher earnings would have on social supports such as Cal Fresh that might be reduced due to a family’s higher wages. We should therefore look at these as more “upper bound” estimates of the effects that a higher wage could have.
- As our interactive Real Cost Measure household budgets illustrate, housing costs easily comprise the highest share of expenses among California households earning below the Real Cost Measure.
- Another unknown is possible job loss for some portion of these low-wage heads of households. Economic researchers have long debated the effects of minimum wage increases. Traditional economic theory held that increased wages would lead to lower-wage businesses hiring fewer workers, and thus that minimum wage increases would actually hurt those that they aimed to help. Numerous studies of the impact of minimum wage increases have shown that minimum wage increases have not caused significant job loss, and in many cases might have helped the overall economy by giving low-wage workers more money to spend. The minimum wage increase planned for California, however, is substantially larger than most, however, and the jury remains out on the effects that this will have on employment and the overall economy. For examples of research on both sides of the issue, see:
Neumark, David. "The Effects of Minimum Wage Increases on Employment" Economic Letter, December 15, 2015. Federal Reserve Bank of San Francisco. http://bit.ly/1sCYWEw.
"Restaurant Industry Unharmed by Modest Minimum Wage Hikes." Cornell Chronicle. January 11, 2016. http://bit.ly/1W0kQLo.
Amos, Orley M. and Antonio Avalos. "Monopsony Competition and Minimum Wage." AmosWeb Encyclomic Webpedia. http://bit.ly/1Z5Q4Sw.
Bernstein, Jared. "Models of the Minimum Wage (for what they’re worth)." November 18, 2015. http://bit.ly/1sTomia.