Minimum Wage Aftershocks Will Cause Public Sector “Wage Hike Tsunami”

As it turns out, the impacts of the increase in minimum wage on workers at the very bottom of the pay scales might be just the tip of the iceberg in terms of the ramifications of the minimum wage increase.

Nothing short of a “tsunami” appears headed towards state and local government balance sheets as the full extent of the minimum wage “aftershock” begins to come into sharper focus. This comes as state and local governments are still reeling from the impact of unfunded pension and health care liabilities on the order of $1.2 trillion and growing, according to Stanford University.

There was a telling story in the Sacramento Bee yesterday titled “How the $15 minimum wage will affect California state workers,” which provides a snapshot into what is likely to turn into a historic increase in the “cost of government” in California—on the order of hundreds of billions of dollars by my initial rough estimates.

The California State Department of Finance pegged the initial impact for the state of California at $235 million annually, growing to $4 billion when fully implemented. But from what I can tell that only includes the workers who will be immediately impacted.

The Sacramento Bee story proves that the state’s public employee unions will use the increase in the minimum wage at the bottom-rungs of a pay scale to push for across the board wage increases for most public employees. And they will likely get it, given how public compensation practices work for public agencies in California.

During the New York public celebration, New York state’s AFL-CIO President Mario Cilento said, “When we raise the floor in wages, we raise the ceiling. Those of you making 16 or 17 or 18 dollars an hour, the net time your union goes to negotiate, they’re going to ask for 19 and 20 and 21 dollars and up!” according to the Sacramento Bee report. (New York also raised its minimum wage)

J.J. Jelincic, a CalPERS board member and former state labor union president and negotiator confirmed that this “will certainly be the strategy for government unions in California,” according to the Bee report.

“My experience is that when you raise the floor, it creates tremendous pressure for raises at least a few rungs up,” Jelincic told the Bee.

There are an estimated 12,000 state employee from custodians to office assistants who earn $15 to $20 per hour, states the report.

The state firefighters union says the “ripple effect of higher minimum wages should flow all the way up the ladder at Cal Fire,” according to union spokesperson Terry McHale. Otherwise, the state risks “compaction,” which occurs when wages for jobs that carry less responsibility get too close or even overtake salaries for higher positions with more responsibility.

As one can see, the impact of SB 3 (Leno) will result in nothing short of a massive increase in the “cost of government” in California that state and local governments will be forced to deal with when they are already having great difficulty making ends meet. SB 3 includes no provisions to pay for the increased costs, so taxpayers will ultimately be on the hook for hundreds of billions of dollars in increased costs.

Further analysis is needed, but my rough estimates suggest that it is not unreasonable to assume cost increases on the order of 20-30% of salaries, when fully implemented. And higher salaries translate into higher pensions, and higher pension unfunded liabilities (roughly 30-40% of salary, up to 60% for public safety).

For the state of California alone, this could mean an additional $20 billion or more in additional salary and benefit costs, potentially even as higher.

And for anyone familiar with the state’s collective bargaining process, this will all flow down to local government employees because all the salaries are connected through wage protocols and public employee compensation practices. Thus, California local governments will be hit with tens of billions of dollars in increased wage and benefit costs when the full effect of the minimum wage “aftershock” is felt.

To minimize the exposure for state and local governments, public officials should look at a “hiring freeze” or implementing a “zero sum” wage negotiation policy—in which all cost increases either result in layoffs or reductions in public employee wages and benefits.

SB 3 (Leno) is already beginning to look a lot like SB 400 (Ortiz-1999) which was billed as “not costing taxpayers a dime” but has resulted in hundreds of billions of dollars increased costs due to exorbitant increases in public employee pension benefits. Fortunately, SB 3 (Leno) does not have constitutional protections, and could be reversed or mitigated by the Legislature or referendum.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change