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<br /> <br />The Effects of a $15 Minimum Wage by 2019 in Santa Clara County and San Jose 39 <br /> <br />person effects. These findings suggest that a change in an industry’s environment can have large <br />effects on worker pay. <br />Effects on prices <br />As we have seen, previous prospective studies have made different assumptions on how much <br />costs will affect prices—and therefore also profits. Card and Krueger (1995) provide an extensive <br />discussion of this issue. As they point out, from the point of view of an individual employer in a <br />perfectly competitive industry, profits would be unaffected only in the extreme case in which firms <br />can costlessly replace low-wage labor with high-skill labor and/or capital, and without cutting <br />output. Since such substitutions are costly, from this perspective a minimum wage increase <br />would have to reduce profits. Firms do not envision a price increase as a solution, as it fears <br />losing sales to its competitors. <br />A different result emerges when Card and Krueger consider the point of view of an industry as a <br />whole. This perspective is necessary since the minimum wage increase applies to all the firms in <br />an industry. Now, when individual firms respond to the prospect of reduced profits by raising their <br />prices, they find that other firms are doing the same. Some of the price increases will stick and <br />the industry will recapture some of the reduced profits. However, since demand for the industry’s <br />product is not fixed, this increase in price entails some reduction in product demand, implying <br />that industry output (and therefore employment) will fall. In other words, the price increase will <br />permit employers to recover only a portion of their reduced profits. Card and Krueger do not, <br />however, take into account the income effect that will increase sales when a minimum wage <br />applies to an entire economy, not just a single industry. <br />The evidence on whether profits do fall is extremely scant. The most important study remains the <br />one in Card and Krueger (1995). These authors obtained mixed results when examining the <br />effects of minimum wage changes on shareholder returns for fast-food restaurant chains. Using <br />British data, Draca et al. (2011) find a small negative effect on profits. However, one segment of <br />this study uses data for firms in the British residential care industry. Firms in this industry were <br />not permitted to increase prices, making the results not very useful for other sectors. Harasztosi <br />and Lindner (2015) examine a large (60 percent) and persistent increase in the Hungarian <br />minimum wage, which affected much of manufacturing. These authors find that cost increases <br />were entirely passed through, but employment did not change and profits did not fall. Of course, <br />the relevance of the British and Hungarian studies for the U.S. is highly uncertain. <br />In our model, employers pass all of the increase in operating costs stemming from a minimum <br />wage increase onto prices, after accounting for the above-mentioned turnover savings, <br />automation, and productivity growth. Studies of price effects of minimum wages are consistent <br />with this model. These studies generally examine data on restaurants. Aaronson (2001) and <br />Aaronson, French and MacDonald (2008) both find complete pass through of costs. However, <br />their data come from a period of much higher inflation, are based on a handful of observations <br />per metro area, and they do not correct their standard errors for clustering. In contrast, Allegretto <br />8.A. - Page 53