AgdaPkt 2017-09-25 Closed and Joint SA PFA

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The Effects of a $15 Minimum Wage by 2019 in Santa Clara County and San Jose 20 Higher payroll costs (net of turnover and productivity savings) will lead firms to increase prices, leading to reduced consumer demand. We will refer to this adjustment mechanism as the scale effect, as it identifies reductions in the scale of output that will reduce the demand for workers. As we have already mentioned, businesses may also respond to higher minimum wages by increasing their investment in equipment. This substitution effect (think automation) also reduces their demand for workers. The income effect has a positive effect on employment, while the scale and substitution effects each have negative effects on employment. The sum of the income, scale, and substitution effects determines the net employment effect of the minimum wage, as shown in the blue box on the right side of Figure 6. Figure 6 is useful for understanding the basic structure of our model. But it leaves out some important details. First, the effects on businesses and workers in the red and green boxes of the model occur simultaneously, not sequentially. The effects in reality are therefore captured only by examining the net effects on the economy and employment. These net effects are symbolized by the blue box at the right of the diagram. Second, Figure 6 omits some feedback loops that would make the figure unwieldy, but which are included in our calculations. Model calibration and dynamics The net effect of minimum wages on employment equals the sum of the income, scale, and substitution effects. The income effect will always be positive, while the scale and substitution effects will always be negative. Whether the net effect is positive, zero, or negative therefore depends upon the relative magnitudes of its three components. These relative magnitudes in turn depend upon the quantitative responses of workers and businesses to a minimum wage increase. We refer to the model’s parameters as the inputs that determine these multiple quantitative responses. Some of these parameters, such as the propensity to substitute capital for labor, may not vary with the magnitude of the minimum wage increase. Other parameters, such as turnover cost savings, are likely to vary with the size of the increase. As with any economic model, we calibrate our model using the best data and research findings available. The details are presented in Section 5 below and in Appendix A2. The model’s parameters and dynamics must be consistent with two conditions. First, the model must be consistent with the very small effects that researchers find for the smaller pre-2015 increases in federal and state minimum wages. Second, although labor demand in low-wage labor markets may be much less responsive to wages than is commonly thought, labor demand is not completely unresponsive. The model must therefore be consistent with growing negative effects if minimum wages were to reach extremely high levels, such as at $25 or $40 per hour. The big unknown, of course, is: At what level do the effects become visibly negative and how quickly do they become more negative? 8.A. - Page 34