Center on Wage and Employment Dynamics

We present here, at the request of the City of San Jose, an analysis of the impact of minimum wage increases for both San Jose and all of Santa Clara County. Both scenarios begin on January 1, 2017 and increase to $15 by January 1, 2019.

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 analysis applies a new structural labor market model that we created specifically to analyze the effects of a $15 minimum wage. We take into account how workers, businesses, and consumers are affected and respond to such a policy and we integrate these responses in a unified manner. In doing so, we draw upon modern economic analyses of labor and product markets. As we explain in the report, the main effects of minimum wages are made up of substitution, scale, and income effects. The figure below provides a guide to the structure of our model.

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.

Our analysis does not incorporate the recent state minimum wage law passed in April 2016. Since the San Jose and Santa Clara County scenarios are on a faster timeline, the number and demographics of workers affected would be similar if we had included the scheduled statewide increases. However, the size of the average wage increase and the effect on firms compared to the new baseline established by the state would be somewhat smaller.