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 65 Part B: Scale effects: increase in consumer prices and reduction in consumer demand Part B of Table A1 estimates the percentage increase in consumer prices due to an increase in operating costs for firms and the annual reduction in consumer demand from price increase. We use the 2014 IMPLAN model to calculate the impact of this reduction in consumer spending on employment. Our estimates are calculated as follows: • The percentage increase in consumer prices ([10]) is assumed to be equal to the percentage increase in operating costs ([11]), following the widely-used Dixit-Stiglitz model of monopolistic competition (Dixit and Stiglitz 1977). • The percentage increase in operating costs ([11]) is obtained by multiplying the net percentage payroll increase ([13]) by the labor share of operating costs ([12]). • The net percentage payroll increase ([13]) includes savings from reduced turnover and the reduction in wage bill due to substitution effects and productivity gains. We estimate the total wage bill increase to be $389 million in San Jose by 2019 (respectively $899 million in Santa Clara County). We subtract the reduction in total wage bill due to substitution effects and productivity gains ([1]). We also account for the increase in payroll costs that corresponds to Medicare, Social Security, and Workers’ Compensation costs. This share equals 10.36 percent in 2019 (see section A2.2 for the source). To compute the net percentage increase in payroll costs, we apply a partial offset for turnover cost savings (see section A2.2 for the source). • The labor share of operating costs ([12]): we estimate the economy-wide labor share of operating costs to be 22.1 percent in 2016 (see section A2.2 for the source). • The reduction in consumer demand from price increase ([14]) is obtained by multiplying the percentage reduction in demand from price increase ([15]) by the annual aggregate consumer spending in San Jose (respectively Santa Clara County) ([16]). The estimated reduction in consumer demand due to higher prices equals $107 million in San Jose (respectively $214 million in Santa Clara County). The key components of this calculation are: o The percentage reduction in consumer demand from price increase ([14]). It depends on two parameters: (i) the percentage increase in consumer prices as calculated in line [10], and (ii) the price elasticity of demand (see section A2.2 for the source). The bigger the price elasticity of demand is, the more sensitive the consumers are to a price change and the greater the percentage reduction in demand from price increase is. o Annual aggregate consumer spending ([16]) is obtained by multiplying the projected annual GDP for San Jose and Santa Clara County in 2019 by an overall estimated share of consumer spending in GDP. We estimate San Jose GDP and 8.A. - Page 79