Democratic legislators agreed yesterday to freeze the income of one-fifth of all Californians by prohibiting cost-of-living increases for state employes and welfare recipients.

The sweeping action, taken in the face of intense political pressure created by passage of the Jarvis-Gann property tax initiative, was a victory for the Republican legislative minority. It also was a nearly complete surrender by Democratic liberals who had been saying that welfare pay increases were needed to keep pace with inflation.

Legislative leaders of both parties said that the decision paved the way for quick action in distributing a $5 billion state surplus to cities, counties and school districts. These local governments have been facing massive cutbacks because of the Jarvis-Gann initiative, a tax-limitation measure which wiped out $7 billion of the $11.4 billion that would have been raised in local property taxes.

With help from the surplus and some increased local fees, most cities and counties and nearly all school districts should be able to operate at 90 percent of their present level during the 1978-79 fiscal year, although further cuts will be needed after that.

One tenth of all Californians - about 2.3 million persons - are welfare recipients. Another tenth work for state and local governments. When family members are included, the total number affected by the income-freeze probably approaches one-third of all Californians, although precise data are unavailable.

Responding to the budget-cutting mood, Gov. Edmund G. (Jerry) Brown Jr. last week proposed a freeze on salaries of state employes. The decision by the Democrats yesterday went further by requiring local governments to adopt a pay freeze as a condition of receiving their shares of the state surplus.

Until yesterday, Assembly Speaker Leo McCarthy was complaining that Republicans wanted to punish "the poorest of the poor" by doing away with welfare increases. But McCarthy, who as an San Franciscan represents one of only three California counties that voted against jarvis-Gann, was not present yesterday.

Instead, he was in a Sacramento hospital recovering from what aides said was a combination of fatigue and an allergic reaction. McCarthy was expected to return today but will be bound by the caucus position.

One of the few Democrats to speak up for welfare recipients in the caucus was Assemblyman Mike Cullen of Long Beach, who said afterwards that legislators were operating in "a climate of fear" created by Jarvis-Gann. But Cullen's impassioned speech found few supporters.

Though Cullen is one of the most highly respected Democrats in the Assembly, he also is a lame duck. He was defeated in the June primary by a candidate who attacked Sacramento politicians and extrolled the virtues of Jarvis-Gann.