The Employment Impact of a Comprehensive Living Wage Law, Evidence from California


The concept of a “living wage” is rapidly gaining support in city councils and county governments across the nation. In most areas, the idea behind this movement is that contractors who receive public funds as payment for their services should in turn be required to pay wage rates of at least $7.50 to $14.50 per hour — rates that are far higher than the federal minimum wage. More than two dozen cities have implemented living wage requirements, and dozens more are debating such proposals today.

At the end of 1998, pressured by organized labor and related special interests, the city of San Jose passed a $10.75 per hour “living wage” that applies to employees of firms receiving municipal tax assistance or doing business with the city. This wage level represents a 109% increase over the federal minimum wage. At the time the bill was passed, San Jose set the standard for the highest wage mandate in the country.

Living wage advocates have plainly stated that their ultimate hope is to implement policies that extend beyond municipal boundaries and cover all employers, not just those with municipal contracts. This report takes the first step toward answering the logical question: if living wage advocates reach their goal, what would be the employment consequences?

Guiding Methodology
Current research on the effects of living wage mandates is difficult to find, largely because the living wage movement (which began in earnest just four years ago) is so young. For guidance, policy makers often must turn to research on the minimum wage. In March 1998, for instance, the Employment Policies Institute published a study by Florida State economist Dr. David Macpherson on the overall economic impact of the 1998 California minimum wage increase from $5.15 to $5.75 per hour. The results indicated more than 25,000 lost job opportunities, approximately $230 million in lost annual California worker income and $790 million more per year in labor costs.

If an 11% hike creates such substantial costs, what would happen if the California State Assembly were convinced that all employers should pay their workers a minimum “living wage” of $10.75? What would happen to entry-level employment levels across California? Who would be most affected? How much would labor costs rise? How much income would laid-off workers lose?
Drawing on Dr. Macpherson’s methodology for estimating the potential effects and distribution of an increase in the California minimum wage, the Employment Policies Institute has calculated the potential effects of a statewide $10.75 minimum wage in California.

A $10.75 Minimum Wage: How Many Workers Would be Laid Off?
An important effect of any potential minimum wage increase is that some workers would lose their jobs because firms would no longer be able to profitably employ them. To estimate the job loss, the following procedure was used: First, the fractional wage gain due to the potential minimum wage increase is computed for each affected worker and then averaged across the sample. Second, the estimated fractional wage gain is used in the following formula to calculate the employment loss:

(1) Employment Loss = Fractional Wage Gain * Affected Worker Employment * Labor Demand Elasticity

This study uses an estimate of labor demand elasticity (–0.22) for minimum wage workers reported by Neumark and Wascher (1998). An elasticity of –0.22 implies that a 10% increase in wages results in a 2.2% decrease in employment of the affected group.

Table 1 presents the results of these calculations for all of the affected workers as well as for subgroups of workers. Overall, the analysis indicates that 612,783 workers are projected to lose their jobs should the California minimum wage increase to $10.75. The breakdowns by demographic groups and location are not surprising: 39.4% have not finished high school; 36.4% are under age 25; 43% have a family income below $20,000 a year; and 48.9% are Hispanic. Slightly less than one-half (49.2%) of the job losses (301,638) would occur in the Los Angeles area and another 15.3% would occur in the San Francisco region.

The results by industry indicate that just under one-third (29.3%) of the projected job losses would occur in the retail trade industry (179,479 jobs). This is not surprising since more than one-half of the workers in retail trade would be affected by this increase. Another 199,750 jobs, or 32.5% of the projected losses, would occur for workers in the service industries.

The findings by occupation show that 41.8% of the losses are predicted to be for those in sales and service occupations. Another 29.2% would occur for those in blue-collar jobs.

A $10.75 Minimum Wage: What Would Be the Cost to Employers and the Income Loss to Laid-off Workers?
Another critical issue would be the cost to employers arising from the minimum wage increase. These higher costs would be either passed on to consumers through higher prices or there would be reductions in firm profits. Also, an important cost to workers would be the loss in income due to the layoffs caused by the potential $10.75 minimum wage.

These costs are calculated in the following manner: First, the increase in labor costs that would occur if no workers are laid off is calculated. This figure is estimated by multiplying the annual increase in wages due to the minimum wage increase times the number of affected workers. Second, the lost income to workers (and thus reduction in labor cost) due to the layoffs is estimated. This number is calculated by multiplying the number of workers who are projected to lose their jobs times their average wage before the minimum wage increase. Third, the net increase in labor cost to employers is calculated by taking the difference between the cost to employers if no layoffs occurred and the reduction in costs due to the layoffs of employees.

Table 2 presents the results of these calculations. The first row of the table indicates that if no layoffs occurred, then the cost of labor to employers would rise by $31.09 billion. The projected worker layoffs of 612,783 would cause $8.3 billion of worker income to be lost. The potential net rise in the cost of labor to employers is estimated to be $22.8 billion.

The results by industry and location indicate these costs would clearly be concentrated in certain industries and locations. In the retail trade industry, net labor costs would rise by $5.7 billion and the income of laid-off workers would be reduced by $2.1 billion. For the service industry, the net employer cost would rise by $7.1 billion and the income loss to displaced workers would be $2.6 billion. The net labor cost to employers in the Los Angeles-Long Beach area would rise by $7.6 billion, while laid-off workers would suffer an income loss of $2.8 billion. For the entire Los Angeles region, the employer costs would rise by more than $11.3 billion, while laid-off workers would have a projected $4.2 billion reduction in income.

Summary and Conclusions
This report examines in a variety of dimensions the effects of a potential rise in the California minimum wage from $5.15 to $10.75. While this hypothetical jump in the wage floor is large, a $10.75 minimum wage has already been implemented for some employers in San Jose. Moreover, living wage advocates have acknowledged that their ultimate goal is a national living wage mandate.

Two main conclusions can be drawn from this report. First, the minimum wage increase could cause 612,783 workers to lose their jobs, with approximately one-third of the job losses in the retail trade industry. This would cause an annual income loss to all affected workers of $8.3 billion. Second, the cost to employers would be quite substantial. The wage mandate would raise labor costs by $22.8 billion per year (even after adjusting for reduced employment), with the costs concentrated in the retail and service industries.

Lost in the living wage debate is the fact that failing to acquire even basic skills can mean a significant decrease in earnings potential. Many low-skill workers develop these skills at entry-level jobs often at the minimum wage. As their skill base increases, so do their wages. Enacting ultra-high “living wages” means denying low-skilled workers the skill-building opportunities they need to make a “living” for themselves and their families.