A Small Raise for the Bottom

C HAPTER 6 A S MALL R AISE FOR THE B OTTOM M ICHAEL R EICH AND P ETER H ALL Introduction Despite the longest economic boom in California's history, a large and increasing number of low-paid workers are not sharing in its prosperity. Indeed, from the mid-1970s to the mid-1990s real hourly wages fell steadily for most workers, by around 25 percent for the lowest fifth of the California workforce and 20 percent for the median worker, and rose only for the top fifth of the workforce. As a result, wage inequality in California is now at record levels and much higher than in the rest of the U.S. For the vast majority of California wage earners, real hourly pay began to grow again only in 1996, at the beginning of the most recent round of minimum wage increases. By 1999 pay at the tenth percentile reached $6.04, 12.1 percent higher than in 1995, while pay at the fiftieth percentile grew by 2.8 percent, to $13 and pay at the ninetieth percentile grew 9.2 percent, to $32.61. 1 As a result, the rate of growth in wage inequality has slowed. This timing suggests that the 1996-98 minimum wage increases may have played a part in a small raise for the bottom. In this chapter, we first discuss the size and growth of low-wage employment in California since 1980 and then examine rising wage inequality in the state in the same period. 2 We go on to present a sustained examination of the 1996-98 California minimum wage increase, which raised the state minimum by 35 percent, from $4.25 to $5.75, or $. 60 above the national minimum. We focus on the extent to which the 1996-8 minimum wage increases can be given credit for the reduction in wage inequality that occurred in the late 1990s. We find that the minimum wage increases did not negatively affect the strong employment growth over the period. At the same time it did benefit large numbers of low-wage workers. Through a series of statistical tests, we also find evidence that the minimum wage increases did reach the lowest income workers and households and did not spill over to high-paid workers. We pay particular attention to the impacts of the policy on low-wage sectors of the economy. Precisely because minimum wages target the lowest paid in the labor market, we need to be careful that it does not lead to the displacement of the most vulnerable workers. Compared to the 1988 increases, the employment and wage effects of the increases were both more benign and more durable. Finally, we discuss the potential impact of increasing the minimum wage further, to $8 (which is the 1968 level in 1999 dollars). The effects of the latest round of increases provide a useful basis from which to assess the likely effects of a further increase. I. The Definition of Low Wages and the Number of Low-Wage Workers For the purposes of this chapter, we use three different definitions of low-wages: less than $6 per hour, less than $8 per hour and less than $10 per hour. 3 We use the $6 figure as a benchmark of the 1998 California real minimum wage (in 1999 dollars) and refer to it as demarcating the lowest-wage workers. The $8 benchmark is very close to what the federal minimum wage would be today if it had maintained its real value since 1968. The