EFFECTS ON WORKERS

There are about 596,000 employees who work in San Francisco. Approximately 14 percent of these workers are employed in the public sector.¹⁵

How to determine the impact of a minimum wage on workers

To estimate the effects of a minimum wage on private sector workers, we divide the total effect into a direct effect and an indirect effect.

Direct wage effect

The direct wage effect consists simply of the wage increases to employees who previously earned below the new minimum wage. Under a new minimum wage of $8.50, for example, a worker previously earning $6.75 would receive a direct increase of $1.75 to the new wage of $8.50. To calculate the direct wage effects we simply increased all workers below the new minimum to the new minimum of $8.50, $9.00, or $10.00.

Indirect effects

Direct wage effects, however, account for only part of the total wage increase to workers. The relative pay employees receive is highly correlated with their job title, tenure, experience, and skill, rated relative to other workers. Consider, for example, a supervisor earning $8.50 an hour prior to a minimum wage increase. If a minimum wage increase brought her supervisees up to $8.50 per hour, it is likely that this supervisor would receive a pay increase to more than this amount. The pay increase received by this supervisor represents the indirect effect of a minimum wage increase. The phenomenon of workers who had previously been paid near the new minimum receiving such unmandated increases in pay is also often referred to as the “ripple effect” of a minimum wage increase.

The size of ripple effects

The metaphor of a ripple suggests that those workers originally closest to the point of impact (the new minimum) receive the largest, most concentrated, effects, while those further out on the ends receive more moderate increases. Card and Krueger (1995) examined the strength and duration of the “ripple” and found that those workers closest to the new minimum indeed received the greatest indirect increases; these increases averaged less than half of the direct increase received by workers previously at the old minimum wage.

The ripple does not extend infinitely. A number of studies (reviewed in Reich and Hall 2001) suggest that any measurable ripple effect ends for workers who originally were paid a wage that is another 100 percent over the increase. In other words, if the minimum wage were to increase by $1.75, from $6.75 to $8.50, then workers who earn more than $1.75 over $8.50—that is, more than $10.25 per hour-- would not receive indirect wage increases. Those who were paid from $8.50 and up would get indirect increases, with the amount approaching zero as the wage approaches $10.25.

The magnitude of the indirect effect, or ripple, falls in a smooth and gradual manner, starting at 100 percent of the mandated wage increase, and falling down to zero. This implies that the average ripple effect for those getting unmandated increases will be half of the maximum. For the purposes of this study, we do not need to calculate the ripple effect for every worker at every wage level, since we know the average effect. The indirect wage effects for each of our wage intervals are then easily simulated: we add half of the difference between the previous average wage and the wage level that would amount to another 100 percent increase over the minimum wage. The example in the box illustrates this calculation more clearly.

Calculating Indirect Effects

If the minimum wage were increased to $10 per hour then a worker currently earning $10 per hour should receive no mandated, or direct, increase. This worker would, however, receive an indirect increase in wages of half the difference between 100 percent over the increase of the previous wage and the previous wage.

This simulation is somewhat more expansive than Card and Krueger’s. Consequently, it likely results in an over-estimate of the indirect effects upon workers and employers.

Results: How a minimum wage would affect workers

Using the average wages calculated as above for workers in each wage category, we estimated the number and percentage of workers who would receive direct and indirect increases. The results are presented in Table 11.

Based on these calculations, we find that 4.4 percent of workers in San Francisco businesses would receive direct wage increases at a minimum wage of $8.50, 5.4 percent at a minimum of $9.00, and 9.6 percent at a minimum of $10.00. Adding the indirect effects gives large proportions: 10.6 percent of workers in San Francisco businesses would receive some sort of wage increase with a minimum wage level of $8.50, 14.6 percent would receive such increases at a minimum of $9.00, and 24.3 percent would receive increases at a minimum of $10.00.

The table above illustrates the direct effects as well as the range of ripple effects. About three times the number of workers receives some degree of wage increase above those who are mandated to receive increases. The amount of increase, however, varies greatly depending on how close the workers are to the new minimum. The impact on payrolls depends also on how many workers are paid at these higher levels.

Recall that with our conservative assumptions, we may be overstating the ripple effect. Other studies, notably Card and Krueger (1995), as well as Reich and Hall (2001) obtained ripple effects that contributed an additional 15 to 20 percent to the direct payroll effects of an increased statewide minimum wage. Reich and Hall (1999) obtained similar results in estimating the prospective impacts of a $10 or $11 living wage for San Francisco service contractors. Reich, Hall and Jacobs (2003) find ripple effects of around 30 percent for living wage effects at SFO. The results in Table 11 above, which suggest a much higher ripple effect, therefore may well be overstated by fifty percent or more. With the limited data available to us, we can do little more than to note this bias here, and to repeat it in the next section as a reason that we may be overstating the impacts on business costs as well.

Table 12 provides more detail on these simulated pay increases. Workers currently earning under $11 per hour would receive wage increases from 2 percent to 48 percent, depending on their current earnings and the new minimum wage that would be in effect. Those workers now at or near the current minimum wage will see the largest increases—ranging from a 26 percent increase at a minimum wage of $8.50 to a 48 percent increase at a minimum wage of $10. Some workers earning above $11 per hour will see wage increases, of about 2 percent, but only if the new minimum wage were $10.

Source: Computed from UCB 2002 San Francisco Establishment Survey, conducted by the authors.

Table of Contents | How A San Francisco Minimum Wage Would Affect Workers and Businesses: Effects on Businesses

15. Non-farm workers, from Worforce Investment San Francisco.