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Press Release · April 28, 2000

Increasing The Minimum Wage Doesn’t Benefit California’s Poor And May Even Cost Them, Study Finds

Higher Income Families Would Get Large Share of Extra Earnings

SAN FRANCISCO, California, April 28, 2000 – Increasing the minimum wage would do little to boost the income of California’s poorest families — and it may even add to their cost of living, according to a new study released today by the Public Policy Institute of California.

In Increasing the Minimum Wage: California’s Winners and Losers, economists Margaret O’Brien-Strain and Thomas MaCurdy find that California families living in poverty would receive only 11 percent of the additional income resulting from a minimum wage increase. Moreover, the study finds that high-income families would receive nearly as much in additional earnings as low-income families. Looking at California’s overall income distribution, families in the lowest 40th percentile would collect 43 percent of the extra income generated by a minimum wage increase, while families in the upper 40th percentile would receive 34 percent of the additional income.

“Overall, we find that increasing the minimum wage does not efficiently target the poor,” says author Margaret O’Brien-Strain. “An increase would redistribute extra earnings to any family that has a minimum wage worker, regardless of the family’s overall income level.” In fact, among the poorest 20 percent of families in California, three out of four do not include a minimum wage worker. These families are poor largely because they either do not have working members or members are working only part time at non-minimum wage jobs.

Besides providing little help to low-income families, a minimum wage increase might even make their financial condition worse. The study finds that raising the minimum wage could cause poor Californians to pay proportionately more for basic purchases such as groceries, because as the minimum wage increases, so do labor costs. Employers respond to increasing wages in one of three ways: They increase prices, reduce employment, or reduce profits. In their analysis, the researchers assume the increased labor costs would be passed on in the form of higher consumer prices and not in job losses or lower profits. The study finds that the 1996 federal minimum wage increase from $4.25 to $5.15 costs California families an average of $133 more per year for the goods they purchase due to higher prices. Because goods produced by minimum wage workers – such as groceries – make up a large share of a low-income family’s total expenditures, poor families end up paying proportionately more for the goods they buy.

Combine higher prices with the fact that most families at the lower end of the income distribution do not include a minimum wage worker and you have an ineffective anti-poverty strategy, say the authors. “These families end up paying higher prices without receiving any extra income,” says O’Brien-Strain. “The redistribution of income that occurs with a minimum wage increase is not from rich to poor, but from families without a minimum wage worker to families with a minimum wage worker.”

Currently, members of Congress are calling for another increase in the federal minimum wage from $5.15 to $6.15. Because California’s minimum wage is already $5.75, the federal increase of $1 would represent only a 40-cent increase for California workers. A federal increase would cause prices to rise on goods produced both within and outside of California, the study finds. The researchers conclude that overall, Californians would end up paying more in the form of higher prices than they would receive through higher earnings.

The Public Policy Institute of California is a private, nonprofit organization dedicated to objective, nonpartisan research on economic, social, and political issues that affect the lives of Californians. The Institute was established in 1994 with an endowment from William R. Hewlett.