Effects of a $15 Minimum Wage by 2019 in San Jose

The San Mateo City Council will vote on the adoption of a $15 minimum wage ordinance at their July 18th, 2016 meeting. To understand the likely impact of a $15 minimum wage, we publish the  following analysis of  the impact of such a wage increase for San José. Authors Michael Reich, Claire Montialoux, Annette Bernhardt, Sylvia A. Allegretto, Sarah Thomason and Ken Jacobs of the UC Berkeley Center for Wage and Employment Dynamics wrote the policy brief at the request of the City of San José. The full policy brief is available from the UC Berkeley Labor Center.

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 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.

Key Findings

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.
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