The Effects of a $15 Minimum Wage in New York State
- Here’s who’s winning the $15 minimum wage wars now
April 7, 2017 - CNBC
- After Years Of Financial Indigestion, Restaurant Stocks Offer Food For Thought
January 5, 2017 - Seeking Alpha
Introduction and Key Findings
Governor Andrew Cuomo of New York has proposed economy-wide minimum wages of $15 in New York City by 2019 and in the balance of the state by mid-2021. In this prospective study, we assess the impact of the proposal on workers, businesses, and consumers to estimate the net effect of the policy proposal on employment over the phase-in period.
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
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 estimate of the effects of a $15 minimum wage is also based upon existing research on labor markets, business operations, and consumer markets. Our estimate compares employment numbers if the policy is adopted to employment numbers if the policy is not adopted. Other factors that may affect employment by 2021 are therefore outside the scope of our analysis. We have successfully tested our model with a set of robustness exercises. In order to make our study manageable, we include in our analysis the sectors that have already been granted pay increases by executive orders.
Effects on workers by mid-2021
- As Cooper (2016) reports, increasing the state minimum wage from $9 to $15 will increase earnings for 3.16 million workers, or 36.6 percent of the statewide workforce.
- As Cooper (2016) also reports, among those getting raises, annual pay will increase 23.4 percent, or $4,900 (in 2015 dollars) on average. These estimates include a ripple effect in which some workers who already earn $15 will also receive an increase.
- Three industries account for nearly half of the private sector workers getting increases: retail trade (17.6 percent), health care and social assistance (18 percent), and restaurants (13.5 percent).
- 79.6 percent of workers in the restaurant industry in the private sector will receive a wage increase, compared to 19.6 percent in finance, insurance and real estate.
Effects on businesses and consumers by mid-2021
- Payroll cost increases will average 3.2 percent over the entire for-profit economy. 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 $9, the current minimum wage.
- Employee turnover reductions, automation, and increases in worker productivity will offset some of these payroll cost increases.
- Businesses could absorb the remaining payroll cost increases by increasing prices slightly—by 0.14 percent per year over the phase-in period. This price increase is well below annual inflation of nearly 2 percent over the past five years.
- Price increases will be much smaller than labor cost increases because labor costs average about one-fourth of operating costs.
- The consumers who would pay these increased prices range across the entire income distribution.
Net effect on New York employment by mid-2021
- Our estimate projects a cumulative net gain in employment of 3,200 jobs by mid-2021, which corresponds to 0.04 percent of projected 2021 employment. On an annual basis, the net effect corresponds to a gain of 0.01 percent in employment in New York State. By comparison, New York State employment growth has averaged 2.0 percent per year over the past five years.
- Our robustness tests support our main finding. The net employment effects remain very small, especially in relation to the 3.16 million low-paid workers getting a 23.4 percent boost in earnings, and the overall size of the New York State job market.
Limits to our study
- Any prospective impact study involves an inherent level of uncertainty. Actual effects may differ from our estimates if future economic conditions vary from current forecasts.
- We estimate the net effects on jobs in the state. The effects will vary within industries and across geographic regions. We discuss these differences but a detailed analysis is beyond the scope of our study.
- We do not take into account the effects of higher wages on worker health and on worker training, which are likely to be positive. Also, although higher parental earnings have well-documented effects on children’s health, educational outcomes, and future earnings, these long-run effects are beyond the time scope of our study.
- A separate analysis is needed to examine effects on state and local employees and nonprofit human services sector, in which funding is dependent on public policy.
- These results cannot be generalized to minimum wages higher than $15. Our model predicts negative effects would occur at some higher minimum wage. However, it is beyond our scope here to determine the level at which negative effects would become detectable.
- Our results indicate that a $15 statewide minimum wage would generate a 23.4 percent average wage increase for 3.16 million workers in the state. This improvement in living standards would greatly outweigh the small effect on employment. And the increase in wages would help reverse decades of wage declines for low-paid workers.
- How can such a major improvement in living standards occur without adverse employment effects? While a higher minimum wage induces some automation, as well as increased worker productivity and higher prices, it simultaneously increases worker purchasing power. In the end, the costs of the minimum wage will be borne by turnover reductions, productivity increases and modest price increases.
Read the full report.