PAYDAY Workforce Solutions Blog

While CA Minimum Wage Raises Pay, It Will Cost Others

On Oct 10, 2013

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At the end of September 2013, Governor Jerry Brown did something that yet again made history. He signed AB 10 into law, a CA minimum wage law that now guarantees a worker will be paid $10 an hour, with the change beginning a phase-in across industries as of July 1, 2014. No surprise, the change puts California in the lead again as the first state to cross the $10 mark for minimum wage requirements.

Employers will see the change come into play within two years, generally boosting minimum wage costs by 25 percent over the last required level. Some occupations will be exempt, such as servers who make their income from tips. However, most employees with hourly positions will be affected. The minimum wage will increase to $9 per hour effective July 1, 2014 and to $10 per hour on January 1, 2016. This new increase will be in addition to rising costs already expected for firms impacted by the federal Affordable Care Act.

The change and approval by the Governor’s signature caught many business elements in the state by surprise. While it was expected the Democrat-controlled Legislature would support the increase, business proponents expected Governor Brown to be more pragmatic. However, the Governor noted he felt morally obligated to approve the increase.

The Impacts of the CA Minimum Wage Increase Will be Many

The most direct affect will be an increase in labor costs and payroll taxes for businesses, assuming they don’t change the number of employees right away. However, this only affects the costs of those employees at minimum wage, so employers who hire a majority of low-end workers will feel the law change the most. Those with workers paid above the $10 level won’t realize any immediate effect.

The next direct effect may be a reshuffling of many businesses with regards to their hiring. As their labor cost goes up, they may not have the additional revenue stream to deal with the increase. As a result, the company owner has to decide what needs to go to balance out the picture. That may be a reduction in other costs, or it may be a reduction in labor costs by cutting pay or laying an employee off. The choice will be different for different businesses, but the need will be the same.

The secondary effect will be felt later, within a year or two. As minimum wage pay goes up, products and services eventually go up in cost as well. The rise in the cost of living will drive up the cost of most basic needs that affect individuals as well as businesses. This happens because as the cost to produce goods and services goes up, they get passed on in pricing to consumers. This is turn drives up the cost of everything else.

In the long-term, the new CA minimum wage increase will be absorbed by the state economy as previous increases have. However, the immediate benefit of higher wages now for some, will raise the cost of living for many later on. The cost has to be absorbed and ultimately consumers pay that expense. Federal minimum wage increases may be on the horizon as well, as President Obama has voiced that he would like it increased to $9 per hour with automatic indexing for inflation.

PAYDAY clients can request a report on current employee rates to prepare for compliance with the new law. For questions on minumum wage, or to order a new 2014 Compliance Poster, please contact us.


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