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Economic Disaster or Economic Bump: What Will Happen If San Francisco Raises Its Minimum Wage?

Two different studies produce two very different conclusions.

 

It's a good bet that San Franciscans will approve an increase in the city's minimum wage to $15 an hour this November. But what effects will that increase have on the local economy? The answer, as shown by two recent studies, isn't so easy to tease out.

When assessing the economic effect of a minimum wage increase, there are two variables that have to be taken into consideration. The first is the amount of increased spending that workers with newly-increased wages will pump into the economy. The second is the number of jobs that may be lost because of a rise in the cost of labor for employers. The trick is to figure out if the good variable (the bump in spending) outweighs the bad one (the dip in jobs).

According to a report by researchers at UC Berkeley, the results of a wage increase will be a net positive for the city. Michael Reich, Ken Jacobs, Annette Bernhardt and Ian Perry of Berkeley's Institute for Research on Labor and Employment, which is funded in part by labor groups, just released this policy brief. Their prediction: An increase in aggregate earnings of $397 million—the average wage in the food sector would see a jump of 9%, for instance—and a negligible change in employment numbers. That's about as rosy a forecast as it can be. 

On the other hand, a report by the office of the city's Chief Economist Ted Egan, paints a less optimistic picture. The report doesn't calculate an aggregate spending increase number, but it does give a range of expected salary increases for workers in various sectors. Were the new minimum wage to fully come online, the average workers in the food sector could expect an additional $125 a week. The average retail worker would be looking at an additional $185 a week, and the average manufacturing worker an additional $197. On the downside, the report expects a decrease in San Francisco's employment numbers of about 15,000 jobs. (That doesn't mean mass layoffs, necessarily. It means the growth in the city's employment numbers would be lower than otherwise expected.)

So what accounts for the difference in these two studies? I asked both economists to talk me through their findings. Reich and I traded emails last week. Egan, citing his office's neutrality on political matters, declined to comment. A close reading of both reports, however, highlights the differences.

It comes down to different models. The UC Berkeley group seems to be relying more heavily on empirical data from previous instances in which the minimum wage was increased. The most obvious of these is the time in 2003 that San Francisco raised its own minimum wage. After that occurred, there was "little to no effect" on employment. That seems, on its face, kind of crazy, doesn't it? But it actually makes a bit of sense: Employers were able to reduce worker turnover (which itself costs them money), improve employee productivity, and, especially in the case of restaurants, pass on a small cost increase to consumer (more on food joints later).

Though the city's analysis agrees that the 2003 increase didn't have an impact on the job numbers, it offers a different reason: The hike in wages was too small that time to have an impact on hiring and firing. That's a contention that Reich rejects: "The 2003 increase was about 28 percent, which was substantial enough to trigger negative employment effects according to many minimum wage opponents," he told me. "The current proposed increase is also about 28 percent, in real terms."

How about the question of earnings increases? The two reports give very different numbers for that, because they rely on different models to make their case. According to the Berkeley report, the city over-estimates the increase in wages on the order of a factor of 2 to 10, depending on the industry. The Berkeley researchers argue that their estimates of wage increases are based more solidly on empirical research, whereas the city is misapplying an off-the-shelf economic model. The city's report isn't exactly on based on reading tarot cards, though. They use a set of mathematical formulae called REMI, which has been around since 1980 and is widely used. (It predicts that a 1% increase in average wages leads to a 0.3% decline in employment.) Much of this discrepancy, then, is hard to resolve.

There's an interesting sub-case here as well—restaurants. That's been the largest flashpoint of concern over the increase in minimum wage (as we've reported previously). What impact would a minimum wage increase have on San Francisco's eateries? According to the Berkeley report, restaurants would see a fairly large operating cost increase—somewhere around 9% of total of payroll costs. Part of that could be made up without a price increase and part would be made up with a modest price increase—something like 2.7%. That means that your roast chicken at Tosca would move from $42 to $43.13.  (Want to see another version of that in action? Check out this amazing Planet Money story about the Westfield Mall in the South Bay, which straddles two different cities and has two different minimum wages.) The city's report, on the other hand, predicts something like a hit of 4,000 jobs in the restaurant industry alone. (The report doesn't give a precise number, but it does say that about half of the job losses would come in retail and food services, so we split those two into even halves to arrive at the estimate.)

Where do these two reports agree? If San Francisco were to raise its minimum wage, it would expect a bump in the earnings of its workers, especially but not only the lowest paid ones. Both reports agree on that. Since part of that money gets used locally, we could expect a limited offset from job losses. How many of those job losses will there be? Zero? 15,000? Some number between the two of those? That's hard to say. A study by the Urban Institute quoted over at City Lab found that 12 different meta-analyses of minimum wage increases found "the reduction in employment [...] is rarely statistically significant." A decent guess is to split the difference—employment numbers will grow ever so slightly less quickly than they have otherwise. Like all things in economics, it's a tradeoff. Here's a helpful explainer from Harvard Shorenstein Center, which surveys a great deal of the literature, and concludes that "The lesson here is to distrust sweeping generalizations about what might result from a minimum-wage increases." Which, yup, sounds about right.

So is that all enough to give a thumbs up to the minimum wage increase? Yeah, probably. But of course, separate from the economic impacts of the raise are the moral considerations about economic distribution. (Paging Dr. Piketty.) San Francisco and the Bay Area is a horridly expensive place to live relative to the rest of the country. The minimum wage isn't a silver bullet, but it's a weapon all the same.

 

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