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The Effects of a $15 Minimum Wage by 2019 in San Jose and Santa Clara County

The Effects of a $15 Minimum Wage by 2019 in San Jose and Santa Clara County

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  • Key Findings

    We present here, at the request of the City of San Jose, an analysis of the impact of minimum wage increases for both San Jose and all of Santa Clara County. Both scenarios begin on January 1, 2017 and increase to $15 by January 1, 2019.

    Critics of minimum wage increases often cite factors that will reduce employment, such as automation or reduced sales, as firms raise prices to recoup their increased costs. Advocates often argue that better-paid workers are less likely to quit and will be more productive, and that a minimum wage increase positively affects jobs and economic output as workers can increase their consumer spending. Here we take into account all of these often competing factors to assess the net effects of the policy.

    Our analysis applies a new structural labor market model that we created specifically to analyze the effects of a $15 minimum wage. We take into account how workers, businesses, and consumers are affected and respond to such a policy and we integrate these responses in a unified manner. In doing so, we draw upon modern economic analyses of labor and product markets. As we explain in the report, the main effects of minimum wages are made up of substitution, scale, and income effects. The figure below provides a guide to the structure of our model.

    UC Berkeley IRLE minimum wage model
    New York State minimum wage

    Our data are drawn from the Census Bureau’s American Community Survey and from other Census and U.S. Bureau of Labor Statistics datasets. We also make use of the extensive research conducted by economists—including ourselves—in recent years on minimum wages, and upon research on related economic topics.

    Our estimates of the effects of a $15 minimum wage are also based upon existing research on labor markets, business operations, and consumer markets. Our estimates compare employment numbers if the policy were to be adopted to employment numbers if the policy is not adopted. Other factors that may affect employment by 2019 are therefore outside the scope of our analysis. We have successfully tested our model with a set of robustness exercises.

    Our analysis does not incorporate the recent state minimum wage law passed in April 2016. Since the San Jose and Santa Clara County scenarios are on a faster timeline, the number and demographics of workers affected would be similar if we had included the scheduled statewide increases. However, the size of the average wage increase and the effect on firms compared to the new baseline established by the state would be somewhat smaller.

     

    Scenario A: Key findings for a $15 minimum wage increase in San Jose – by 2019

    Economic context

    • When accounting for inflation, median earnings in San Jose were 10.5 percent lower in 2014 compared to their 2007 pre-recession level. Median annual earnings in San Jose are 20.9 percent higher than the state as a whole, but 17.3 percent less than median earnings in Santa Clara County.
    • Unemployment rates have declined significantly for the state and San Jose. The April 2016 unemployment rate for California was 5.3 percent, down to its 2007 pre-recession rate. Annual unemployment in San Jose had was 4.5 percent in 2015, lower than its pre-recession rate (5.2 percent in 2007).

    Effects on workers – by the end of 2019

    • Increasing the minimum wage to $15 would increase earnings for 115,000 workers, or 31.1 percent of the city’s workforce.
      Among those getting raises in San Jose, annual pay would increase 17.8 percent, or about $3,000 (in 2014 dollars) on average. These estimates include a ripple effect: some workers who already earn $15 will also receive an increase.
    • 96 percent of workers who would get increases are over 20 and 56 percent are over 30—with a median age of 32.
    • The proposed minimum wage increase would disproportionately benefit Latinos, who represent 53 percent of affected workers.
    • Workers who would get pay increases are less-educated than the overall workforce, but almost half (48 percent) have some college experience or higher.
    • The median annual earnings of workers who would get raises ($18,100 in 2014 dollars) are 36 percent of median earnings for all workers in San Jose ($50,507). Workers getting increases are disproportionately employed in part-time jobs, and are also less likely to have health insurance through their employer.
    • Workers who would get pay increases disproportionately live in low-income families; on average, they earn close to half of their family’s income.
    • The research literature suggests downstream benefits from the proposed wage increase, such as improved health outcomes for both workers and their children, and increases in children’s school achievement and cognitive and behavioral outcomes.

    Effects on businesses and consumers – by the end of 2019

    • Three industries account for over half of the private sector workers getting increases in San Jose: restaurants (21.0 percent), retail trade (19.1 percent), and administrative and waste management services (14.7 percent).
    • 77.8 percent of workers in the restaurant industry in the private sector would receive a wage increase, compared to 11.5 percent in manufacturing.
    • Total wages would increase by 10.1 percent for restaurants and 1.3 percent across all employers. This increase is much smaller than the minimum wage increase because many businesses already pay over $15 and many workers who would get pay increases are already paid more than the current minimum wage. In addition, the workers who would receive pay increases are the lowest paid workers in San Jose and their wages represent only 8.3 percent of total wages.
    • Employee turnover reductions, automation, and increases in worker productivity would offset some of these payroll cost increases.
    • Businesses could absorb the remaining payroll cost increases by increasing prices slightly—by 0.3 percent through 2019. This price increase is well below annual inflation of 2.5 percent over the past five years. Price increases in restaurants would be higher, 3.1 percent.
    • Price increases would be much smaller than labor cost increases because labor costs average about 22 percent of operating costs; compared to 31 percent for restaurants and 11 percent for retail.
    • The consumers who would pay these increased prices range across the entire income distribution.

    Net effect on employment in San Jose, Santa Clara County and nine nearby counties – by the end of 2019

    • Our estimate projects slightly slower employment growth during the phase-in period than without the minimum wage increase: cumulatively, 960 fewer jobs by the end of 2019 in San Jose, which corresponds to 0.3 percent of projected 2019 employment. In comparison, employment in the state is projected to grow 1.32 percent annually in the same time period.
    • Most of the reduction in job growth in San Jose reflects leakage of the increased spending by workers getting increases into the rest of the region. A substantial share of San Jose workers who would get pay increases live and spend their increased income in neighboring areas. Taking into account the increased spending in surrounding areas, we estimate there would be 80 fewer jobs over the larger regional area than without the wage increase. This area includes the following counties: Santa Clara, Alameda, San Mateo, San Francisco, Santa Cruz, Monterey, and San Benito.

     

    Scenario B: Key findings for a $15 minimum wage increase in all of Santa Clara County – by 2019

    Economic context

    • After accounting for inflation, the earnings of typical workers in the county declined by 8.3 percent between their pre-recession level in 2007 and 2014. Median annual earnings in Santa Clara County are 49.6 percent higher than in the state as a whole.
    • Santa Clara County has experienced rapid employment growth in the recovery from the recession. Over 62 percent of Santa Clara County’s working age residents are employed, compared to 57 percent in the state as a whole.
    • The unemployment rate in Santa Clara County was 4.2 percent in 2015, significantly below the pre-recession rate and falling.

    Effects on workers – by the end of 2019

    • Increasing the minimum wage to $15 would increase earnings for about 250,000 workers in Santa Clara County, or 25.3 percent of the county’s workforce.
    • Among those getting raises in Santa Clara County, annual pay would increase 19.4 percent, or $3,200 (in 2014 dollars) on average. These estimates include a ripple effect in which some workers who already earn $15 will also receive an increase.
    • The demographics of the affected workers in Santa Clara County mirror those in San Jose: 95.5 percent are over the age of 20, with a median age of 32; 37.0 percent are married; 33.9 percent have children; nearly half are Latino.
    • The median annual earnings of affected workers ($17,821 in 2014 dollars) are about one-third of the median for all workers in Santa Clara County ($57,956).

    Effects on businesses and consumers – by the end of 2019

    • Three industries account for nearly half of the private sector workers getting increases in Santa Clara County: food services (20.2 percent), retail trade (16.1 percent), and administrative and waste management services (11.9 percent).
    • 71 percent of workers in the restaurant industry in the private sector would receive a wage increase, compared to 11.2 percent in manufacturing.
    • Total wages would increase by 9.5 percent for restaurants and one percent across all employers. This increase is much smaller than the minimum wage increase because many businesses already pay over $15 and many workers who will get pay increases are already paid over the current minimum wage. In addition, the workers who would receive pay increases are the lowest paid workers in Santa Clara County and their wages represent only 6.1 percent of total wages.
    • Employee turnover reductions, automation, and increases in worker productivity would offset some of these payroll cost increases.
    • Businesses would absorb the remaining payroll cost increases by increasing prices slightly—by 0.2 percent through 2019. This price increase is well below annual inflation of nearly 2.5 percent over the past five years. Price increases in restaurants would be higher at 2.9 percent.
    • Price increases would be much smaller than labor cost increases because labor costs average about 22 percent of operating costs; compared to 31 percent for restaurants and 11 percent for retail.
    • The consumers who would pay these increased prices range across the entire income distribution.

    Net effect on employment in Santa Clara County and nine nearby counties – by 2019

    • Our estimate projects slower employment growth over the phase-in period than without the minimum wage increase: cumulatively, 1,350 fewer jobs by the end of 2019 in Santa Clara County, which corresponds to 0.1 percent of projected 2019 employment. In comparison, employment in the state is projected to grow 1.32 percent annually in the same time period.
    • Based upon regional commuting and spending patterns, we estimate a net gain of less than one hundred jobs over the larger region that includes the counties of Santa Clara, Alameda, San Mateo, San Francisco, Santa Cruz, Monterey, and San Benito. The employment gains generated by a $15 minimum wage within Santa Clara County are spread over nearby counties.

  • Press Coverage

    San Jose Joins Regional Push to Up Minimum Wage to $15
    San Jose Inside | November 16, 2016

    States and cities cautiously raise minimum wage
    PBS NewsHour The Rundown blog | June 29, 2016

    Study Shows Regional Impact of Minimum Wage Increase
    San Jose Inside | April 21, 2016

    San Jose councilmembers, academics discuss regional minimum wage study
    Silicon Valley Business Journal | April 19, 2016

    San Jose: Advocates push to raise minimum wage sooner than state
    San Jose Mercury News | April 18, 2016

    Study shows benefits to raising minimum wage in San Jose
    ABC7 News | April 18, 2016