Despite our state’s relatively poor job performance, California voters are being asked to accelerate minimum wage increases this November. As they consider this year’s minimum wage ballot measure, Californians may wish to think about the high cost of hiring new workers, which includes much more than the hourly wage.
Total employment in California remains well below its pre-pandemic peak, and has remained stagnant since Spring 2022. By contrast, Florida, Texas, Arizona, and Nevada are all seeing record employment levels in 2024. California’s latest unemployment rate of 5.2% is well above the national rate.
One factor retarding California’s employment growth is its minimum wage rules. All workers around the state must receive $16.00 per hour, with higher minimums applying to fast food workers and employees in counties and cities that impose their own minimums, For example, Santa Monica’s minimum wage is $17.27 for all employees, while Long Beach has a special $23.00 floor for hotel workers.
Proposition 32 would raise the statewide minimum to $18 for employers with at least 26 employees on January 1, 2025; smaller employers would face the same floor a year later.
But several employer-paid payroll taxes add to the cost of hiring minimum wage workers. The largest of these are federal social security and Medicare taxes which total 7.65% of the employee’s hourly wage.
On top of that are federal and state unemployment taxes. Because these only apply to the first $7000 of wages, it is best to think in terms of the maximum amount that an employer would pay each year, since even part time, minimum wage employees usually exceed this threshold. State unemployment insurance taxes are $238 per employee for new employers and can then rise or fall based on claims experience. There is also a pesky $7 Employment Training Tax.
In most states, federal unemployment tax is $42, but in California it is higher and rising because the state borrowed from the federal government to fill its unemployment trust fund and has yet to repay the loan.
So long as there is an outstanding loan balance, the federal government will increase the amount of unemployment tax it levies on California employers by $21 per year until it reaches $420. In 2025, the tax will be $105. Most states paid off their federal unemployment loans, often using COVID relief funds, but California and New York chose to spend their windfall elsewhere, leaving employers to pick up the tab.
Additionally, there is worker’s compensation insurance which employers are required to purchase. Rates vary by industry and other employer characteristics, but the statewide benchmark rate published by the Department of Insurance is 1.38% of payroll. And, finally, employers with 50 or more full time employees must either offer health insurance or pay a penalty for not doing so.
While employers will spend much more than $18 per minimum wage employee if Proposition 32 passes, not all of that $18 will go to these workers. While they may owe little or no federal and state income taxes, the employee shares of social security and Medicare taxes are levied on the first dollar of income.
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California also has its own payroll tax: a 1.1% levy on every dollar of income for disability insurance. This tax is also high relative to other states because it finances California’s generous paid family leave benefit. Only 13 of the 50 states have mandatory paid family leave, and California is the only state that does not limit the total number of weeks an individual can receive support each year.
Putting it all together, if Proposition 32 passes, larger businesses will have to pay employees at least $19.63 per hour and about $350 annually next year. Minimum wage employees will take home no more than $16.43 per hour even if they have no income tax liability.
Marc Joffe is a federalism and state policy analyst at the Cato Institute.
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