UC Berkeley Study Predicts Positive Economic Benefit From California's Minimum Wage Increases

Are minimum wage increases good for the economy on the whole or bad?

Getting an accurate, nuanced answer to that question is no easy task. There are all sorts of factors. Higher wages could incentivize businesses to automate jobs and lay off workers. They could also prompt companies to raise prices, which could turn off customers.

On the other side of the equation, higher wages mean more money in the pockets of low-income workers, who could then spend more.

A new study by UC Berkeley’s Institute for Research on Labor and Employment crunches the numbers for a bunch of these factors to try to predict the impacts of California's rising minimum wage, which will gradually increase to $15 per hour over the next six years. The study's authors came to two major conclusions: The state's higher wages will lead to large increases in pay for workers, and they will not result in major job losses.

Michael Reich is a co-author of the paper, which focuses on data in Fresno County, a relatively poor area of the state. “I find that the effects that would be negative -- raising prices somewhat, negative effects on employment, more automation -- are countervailed by increased purchasing power that workers have,” Reich said.

UC Irvine economist David Neumark is skeptical about the UC Berkeley study. “It is clear from the many studies the Berkeley economists put out on predicted effects of minimum wages in the state, and in California cities, that they are picking assumptions that lead to favorable outcomes and minimize adverse consequences,” Neumark said.

The study does back up what CEO Bill Phelps is noticing at his fast-food chain, Wetzel’s Pretzels.

Phelps says the minimum wage increases have been great for his business because low-wage workers have more money to spend to buy pretzels. Sure, Phelps says the company has increased prices slightly, but he says any fall in demand for his products because of rising prices has been far outweighed by the extra business.

(You can read more here about what the CEO and franchise owners of Wetzel’s Pretzels are seeing happen at their stores.)

Reich said more than 5 million Californians will receive a raise through the state’s incremental increases in the minimum wage. Some economists fear that businesses will have to hike prices to pay their employees more, which could lead to fewer sales and then layoffs or job automation.

Reich and his colleagues calculated that price increases will generally be small and not have a major impact on sales. “A 99-cent burger might go up by a nickel if the minimum wage goes up from $10 to $15 over a five- or six-year period,” Reich said.

This is the kind of small price increase that's happening at Wetzel’s Pretzels, and CEO Bill Phelps says it has not hampered the sales bump that happens each time the state raises the minimum wage.

The UC Berkeley study is predictive, suggesting the economic effects in California in the years to come. The state is on track to arrive at a $15 minimum wage by 2023. And as those wages go up, economists will have more and more data to see if the predictions in the study actually come true.