AnalyzingtheEconomicImpactofa$15Minimum

WageUsingREMIFahadFahimullah,YiGeng,DanielMuhammedandJeffreyWilkins

OfficeofRevenueAnalysis,OfficeofChiefFinancialOfficer

DistrictofColumbia

October18th,2016 1

AgendaforToday’sPresentationI.  Background

II.  Data&Methods

III.  ResultsI.  EmploymentEffectsII.  Wage&SalaryEffectsIII.  Price&ConsumpQonEffectsIV.  FiscalEffects

IV.  Conclusions&Takeaways2

I.Background

3

CurrentProgressin$15/hourMinimumWage

•  NewYorkCity,fast-foodworkers:$15perhourby2018inNewYorkCity,andby2021intherestofthestate.

•  Buffalo,NY,MountainView,CA,Missoula,MTandSea;le,WAon$15schedule

•  LosAngeles:$15/hourby2021•  Massachuse;s,homehealthcareworkers:

$15by2018

•  CaliforniaandNewYorkStatepassed$15minimumwageincreaseintolawinApril,2016.TheminimumwageforCaliforniaandNewYorkworkerswilljumpto$15anhourin2022and2021respecQvely.

•  DCMayorBowsersignedintolawtheFairShotMinimumWageAmendmentActof2016.DCMinimumwagewillberaisedto$15perhourby2020.

4

HowDoHigherMinimumWagesImpacttheDCEconomyandDCResidents?Ø Pros:

•  EmployeesinDCbusinesseswillhavehigherincome;moremoneywillbespent,andsaved,inDCandthemetropolitanarea

•  ImprovedproducQvityinDCbusinessesandlowerturnoverandrecruiQngcosts

Ø Cons•  Increaseinthecostofdoingbusiness(lossofcompeQQveness)inDCleadstojoblosses

•  IncreasesinlaborsupplyfromsurroundingDCmetropolitancounQesforDCjobs

5

TimelineofCurrentandFutureMinimumWagePolicy

Date HourlyWage AnnualFullTimeSalary*

Prior8/14 $8.25 $17,160

7/1/2014 $9.50 $19,760

7/1/2015 $10.50 $21,840

7/1/2016 $11.50(39%increasev.$8.25) $23,920

7/1/2017 $12.50 $26,000

7/1/2018 $13.25 $27,560

7/1/2019 $14.00 $29,120

7/1/2020 $15.00(30%increasev.$11.5)

$31,200

*Basedon40HoursperWeekforMinimumWageWorkers6

CurrentandProposedDCMinimumWagePolicies

Basedon2.3%projectedinflaQonfrom2016to2032.

7$8.25

$9.5

$10.5

$11.5$12.31

$12.60

$15.11

CurrentPolicy

$15.00

$17.99

ProposedPolicy

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

$20.00

$22.00

Minim

umW

age

II.Data&Methods

8

DistributionofImpactedWorkersbyWage

WageDistribuUon #AllDCWorkers

#ResidentWorkers

MinimumWage($8.25) 14,993 5,997

$8.25-$11.5 55,925 22,370

$11.5-$12.5 14,260 5,704

$12.5-$13.5 12,772 5,109

$13.5-$15 17,776 7,111

SubTotal(DirectImpact) 115,727 46,291

$15-$18(Spillover) 36,144 14,458

Total(WithSpilloverEffects) 151,871 60,748TotalWageandSalary

Employment* 751,842 345,573

PercentageofWorkersImpacted 20.2% 17.6%

9

Note:SpilloverreferstothefactthatemployerstypicallyincreasethewagesofworkersslightlyabovethenewminimumwageaswelltopreservesomelevelofwagedifferenQalNote:Theabovefiguresexcludeselfemployedandproprietors.DataSource:ACS,BLSandBEA

GrossImpactonTotalWagesandSalariesAsof2021

ImpactonPrivateW&S AllDCEmployees

DCResidents

IncreaseinPrivateSectorW&S(forWorkersEarningbelow$15/

hour,$m)$387.95 $154.78

WithSpilloverEffects(includingW&Sbetween$15and

$18/hour,$m)**$493.23 $197.29

TotalPrivateWSin2021($m) $53,056 $21,222

PercentageofImpact 0.93% 0.93%

Note:GrossImpactassumesnoeconomicreacQon,suchaschangesinemployment,wageandpricelevels,topolicychanges.Note:ImpactonDCBusinessCostin2021Willbe$531mm,including$493millioninhigherwagecostand7.65%,orabout$38mmofaddiQonalsocialsecuritytaxonhigherwagesandsalaries.

10

WageIncreaseforMinimumWageWorkers

Year

MaxWageIncreaseperHour

AVGWageIncreaseperHour

AVGWageIncreaseperYear

MaxWageIncreaseperYear

2020 $2.40 $1.99 $3,861.66 $4,677.07

2019 $1.69 $1.31 $2,542.70 $3,283.00

2018 $1.21 $0.89 $1,732.53 $2,362.75

2017 $0.74 $0.50 $963.37 $1,430.39

11

SizeandPercentageofMinimumWageDirectImpact,byIndustry

*The total wage cost increase for the food service sub-industry is 7.84%. Source: 2014 BLS Occupational Employment and Wage Estimates for DC Converted to Industry Information Using National Industry Occupation Matrix

5.79%*

0.78%

0.99%

4.21%

0.90%

0.14%

0.58%

1.45%

2.38%

0.19%

0.21%

0.40%

0.81%

0.25%

0.09%

0.33%

0.16%

0.00%

0.00%

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

AccommodaQonandFoodServices

OtherServices

HealthCareandSocialAssistance

Retailtrade

AdministraQveandSupportandWasteManagementand

Professional,scienQfic,andtechnicalservices

EducaQonalservices

RealEstateandRentalandLeasing

Arts,Entertainment,andRecreaQon

FinanceandInsurance

InformaQon

ConstrucQon

TransportaQonandWarehousing

Wholesaletrade

Managementofcompaniesandenterprises

Manufacturing

UQliQes

Mining,Quarrying,andOilandGasExtracQon

Agriculture,Forestry,FishingandHunQng

12

WhatisREMI?

13

•  Incorporates four major modeling approaches: Input-Output, Econometric, Economic Geography, and General Equilibrium.

•  At the core of the REMI model is the Input-Output matrix. DC’s industry structure captured in the model as well as DC’s inter-industry transactions.

•  Unlike standard I/O models which only account for the direct output changes entered into the model, REMI incorporates the displacement and/or augmenting effects on similar businesses in a region.

SampleofREMIEquations•  1) Output equations: DC REMI model is a 70 sector model, Output for 67 3-digits NAICS

Code private Sectors and 3 government Sectors, are calculated from a regionalized input-output model. For industry i, (i =1,…,70) the output equation is

𝑄↓𝑖 =∑𝑗=1↑70▒𝑝↓𝑖 𝑎↓𝑖𝑗 𝑄↓𝑗  + 𝑅↓𝑖 (𝐶↓𝑖 + 𝐼↓𝑖 + 𝐺↓𝑖 )+ 𝑋↓𝑖  (1) •  2) Labor Demand: Once we have value added in sector i and intermediate input determined,

the optimal labor and capital demand in sector i can be calculated from a constant returns to scale Cobb-Douglas function: 𝑉𝐴↓𝑖 = 𝐴↓𝑖 ( 𝐿↓𝑖 )↑𝛼↓𝑖  ( 𝐾↓𝑖 )↑𝛽↓𝑖  ( 𝐹↓𝑖 )↑𝛾↓𝑖  , where 𝑉𝐴↓𝑖  is value added for sector i, 𝐴↓𝑖  is total factor productivity, 𝐿↓𝑖 , 𝐾↓𝑖 , and 𝐹↓𝑖  are labor, capital and fuel respectively, and α+β+γ=1. Demand for labor can be derived through cost minimization and be expressed as

𝐿↓𝑖 = 𝑉𝐴↓𝑖 (1/𝐴↓𝑖  )(𝑤↓𝑖 /𝛼↓𝑖  )↑𝛼↓𝑖 −1 (𝑟↓𝑖 /𝛽↓𝑖  )↑𝛽↓𝑖 −1 (𝑓↓𝑖 /𝛾↓𝑖  )↑𝛾↓𝑖 −1  (2)

14

III.Results

15

ScenariosandAssumptions Scenarios DescripUons AssumpUons

Case1 Base Onlyworkerscurrentlyearninglessthan$15/hourwillbenefit

Case2 Spillover InaddiQontoCase1,workersearningslightlyaboveminimumwage($15-$18/hour)willalsobenefit

Case3 ProducQvity InaddiQontoCase2,higherminimumwagewillincreaseworkers’producQvityandreduceturnover&recruiQngcosts.TotalSaving=30%oftheincreaseinbusinesscost

Case4 ConsumpQon InaddiQontoCase3,minimumwageworkerspaynofederalandlocalincometaxandwillspendalltheirextraincomeonconsumpQon

Case5 EfficiencyWage

SameasinCase4,buttotalsavingsfromhigherproducQvity,lowerturnover&recruiQngcostsaregreater.TotalSavings=75%oftheincreaseinbusinesscost.

16

JobLossImpactonAllDCWorkers

Case1:Base

Case2:WithSpillover

Case3:HigherProducQvity

Case4:AddiQonalConsumpQon

Case5:EfficiencyWage

-4,500

-4,000

-3,500

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

5002017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

JobLoss

17

JobLossImpactonAllDCWorkers(%)

Case1:BaseCase

Case2:WithSpilloverEffect

Case3:HigherProducQvity

Case4:WithAddiQonalConsumpQon

Case5:EfficiencyWage

-0.70%

-0.60%

-0.50%

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

0.10%2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

JobLoss

18

PrivateEmploymentJobLossbySector

HealthCareandSocialAssistance

AllOthersectors

(194)

(329)RetailTrade

OtherServices,exceptPublicAdministraQon

(612)

(987)

AccommodaQonandFoodServices

-1.80%

-1.60%

-1.40%

-1.20%

-1.00%

-0.80%

-0.60%

-0.40%

-0.20%

0.00%

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

19

CommuterEffectsDCMetropolitanAreaMinimumWageWorkers

Workers

•  At$9.50/hrminimumwagein2014,therewere11,603workersworkinginDCand103,667minimumwageworkersworkinginnearbycounQes

•  At$15/hourminimumwage,weexpectmorepeoplefromnearbycounQestocompeteforDCjobs

20

CommuterEffects(cont’d)

•  DCasashareofitsMSAisthesmallestcomparedtootherciQes.Thismagnifiesthecommutereffect

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

DC Seanle SanFran LosAngeles NewYorkCity

CitysizecomparedtoMSA

82%

61%67% 67%

40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

DC Seanle LosAngeles NewYorkCity SanFran

MinWageIncr2014-2020

•  DCwillhavethelargestcumulaQveminimumwageincreasefrom2014-2020comparedtoanyothercity(from$8.25to$15) 21

SurveyofMinimumWageEmploymentElasticities

Studies EffectedpopulaUon

NSW-1 Neumark,Salas&Wascher(2014) Teens

NSW-2 Neumark,Salas&Wascher(2014) Restaurantworkers

SBH-1 Sabia,Burkhauser&Hansen(2012) Workerswithhighschooldegree,nobachelors

SBH-2 Sabia,Burkhauser&Hansen(2012) Workerswithatleastabachelors

DLR Dube,Lester&Reich(2010) Restaurantworkers&accommodaQon,foodservice,retailindustries

CK Card&Krueger(2000) Fastfoodworkers

ABC Addison,Blackburn&Coq(2014) Restaurantandbarsectorworkers

B&M Belman&Wolfson(2014) Aggregateof70+studiesshowingeffectofminimumwageonjobs

ORA** DCOfficeofRevenueAnalysis(2016)

DCResidentWorkerswithWSbetween$3,000-$32,000.

**ORA-Hi:ModeledapproximaQonofNSW-1,NSW-2andSBH-1ORA-M:MostlikelyesQmateORA-Lo:ModeledapproximaQonofDLR,CKandABC

22

EstimatedEmploymentElasticities

*ForDCResidents;PrivateEmployment23

-0.20

-0.05

-0.13-0.14

-0.09

-0.07

-0.010.00 0.00 0.00

0.10

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

NSW

-1

NSW

-2

SBH-1

ORAPessim

isQc

ORAM

iddle

B&M(U

rbanInst.)

ORAO

ptmisQc

DLR

CK

ABC

SBH-2

ChangesinWagesandSalaries(W&S)forAllDCWorkersandResidentWorkers,MiddleCase

$493,227,332

$539,821,429

$603,198,333

$394,099,786 $386,334,464

$436,817,295

$197,290,933$215,928,571

$241,279,333

$139,853,508$108,421,105 $101,301,512

$-

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

$700,000,000

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

GrossW&SIncrease-AllDCWorkers

NetW&SIncrease-AllDCWorkers

GrossW&SIncrease-Residents

NetW&SIncrease-Residents

24

NetWage&SalaryEffects(2021)

493

-71 -28

394

-$1,000

$0

$1,000

EmployeePerspecQve

MinimumWageIncrease

JobLoss

WageSlowdown(non-minwage)

NetWageIncrease(Citywide)

$531$71 $28 $118 $171 $143

$0

$1,000

BusinessPerspecQve

MinimumWageIncreaseandAddiQonalSSTax

JobLoss

ReducedWages

ProducQvityGains

PriceIncrease

ProfitLossandOtherCostSaving

•  Employeesgain$493mminaggregatewages

•  However,duetojoblossesfor1,817peopleandslowerwagegrowthfortheabove$18/hourpopulaQon,therearesomeoffseqngeffects

•  TheNetEffectonWagesis$394mmin2021

•  Businessesface$531mmincosts•  They‘payforthis’inseveralways:

•  Layoffs($71mm)•  Lowerwagegrowthfor$18/hr+employees($28mm)•  ProducQvitygains(118mmsavings)•  PriceIncreases($171mm)•  Misc.costsavinginiQaQves&decreaseinprofits($143mm)

25

540

-109 -44

386

-$200

$0

$200

$400

$600

EmployeePerspecQve

MinimumWageIncrease JobLoss

WageSlowdown(non-minwage) NetWageIncrease(Citywide)

$581$109 $44 $116 $179 $133

$0

$1,000

BusinessPerspecQve

WageIncreaseandAddiQonalSSTaxJobLossReducedWagesProducQvityGainsPriceIncreaseProfitLossandOtherCostSaving

•  TheNetEffectonWagesis$386mmin2026 •  Businessesface$581mmincosts

NetWage&SalaryEffects(2026)

26

SharingtheBurdenWhoPaysthe$531millionHigherWageCostin2021?

WhoPaysthe$581millionHigherWageCostin2026?

Workers-Layoffs,SlowerWageGrowth19%

HigherProducQvityandLowerTurnoverCost22%

Businesses-LowerProfits27%

Consumers-HigherPrices32%

Workers-Layoffs,SlowerWageGrowth26%

HigherProducQvityandLowerTurnoverCost20%

Businesses-LowerProfits23%

Consumers-HigherPrices31%

27

DifferencesBetweenGrossandNetW&SImpactsforDCResidents

$-

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

$139,853,508

$197,290,933

W&SIncreasewithDyanmicEffects,ResidentsFromJobLossforMinmum-WageWorkersFromReducedWageforNon-MinimumWageWorkers

28

DCGDPandItsComponents(millions,2009Dollars)

2021 2026 2032

Consumption $72(0.19%)

$49(0.12%)

$37(0.09%)

Investment $-3(-0.02%)

$-24(-0.17%)

$-35(-0.20%)

Government Expenditures

$-10(-0.01%)

$-21(-0.04%)

$-25(-0.05%)

Net Export $-126(-0.70%)

$-144(-0.77%)

$-141(-0.67%)

Exports $-64(-0.07%)

$-113(-0.11%)

$-126(-0.12%)

Imports $62(0.08%)

$31(0.04%)

$14(0.02%)

Net Changes in Real GDP

$-66(-0.06%)

$-140(-0.11%)

$-163(-0.12%)

-200

-150

-100

-50

0

50

100

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

PersonalConsumpQonExpendituresMillions

GrossPrivateDomesQcFixedInvestmentMillionsGovernmentExpendituresMillions 29

ChangesinMajorConsumptionCommodityPrices

2021 2026 2032PCE Price Index (2009=100) 127.67 140.85 158.44

PCE Price Increase Over Baseline

0.26(0.20%)

0.25(0.18%)

0.25(0.16%)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Percen

tage

Purchasedmealsandbeverages2009=1(NaQon)

Personalcareandclothingservices2009=1(NaQon)

Householdmaintenance2009=1(NaQon)

AccommodaQons2009=1(NaQon)

DCAggregatePCELevel2009=1(NaQon)

ClothingandFootwear2009=1(NaQon)

30

WhathappenedtoFoodPriceinRestaurantsin2020?40cents

• ForEvery$1inFoodPurchasedinRestaurants• 40centsaretheaveragelaborcost

3.5cents• Restaurantslaborcostwillincreaseby7.84%•  Increaseinlaborcostsper$1offood:3.1cents

1.6cents• Restaurantswillbeabletoincreasemenupriceby1.5centsin2021• $1Foodprice=$1.015,or1.5%increaseoverbaselineprice

46%• 1.5centsofthe3.1centsoftheincreaseinlaborcost,or48%willbepassedtoconsumers

31

FiscalImpact(millions) 2021 2026 2032

Real Consumption (2009 $)

$72(0.19%)

$49(0.12%)

$92(0.22%)

Nominal Consumption

$163(0.40%)

$144(0.30%)

$186(0.34%)

Nominal Wages and Salaries

$140(0.26%)

$108(0.17%)

$101(0.13%)

Nominal Business Profit -$143 -$133 -$152

(millions) 2021 2026

Sales Tax $6.14 $5.33

Personal Income Tax $5.87 $4.35

Corporate Franchise and UB

Tax -$10.02 -$9.33

Total Impact $1.99 $0.36

32

ResultsØ TotalAffectedDCresidents:~61,000Ø  JobsforDCresidents:

Ø  1,181jobslost(-0.35%)by2021;2,046by2026;2,473by2032

Ø TotalRealConsumpQoninDC:Ø  Increasedby0.19%in2021;0.12%in2026,and0.09%in2032

Ø TotalDCRealGDP:Ø  Decreasedby$66mmin2021,by$140mmin2026,andby$163mmin2032

Ø EarningsforDCresidents:

Ø  Increasedby$140mmin2021;$108mmin2026,and101mmin2032

Ø Earningsfornon-residentsDCworkers:Ø  Increasedby$254mmin2021;$278mmin2026,and$335mmin2032

Ø ConsumerPricesØ  Increasedby.20%in2021,by.18%in2026andby.16%in2032

Ø DCFiscalandEconomiceffects:$1.99millionin2021

33

ConclusionsØ FromDC’sperspecUve:

Ø ~61,000oftheDC’spoorestresidentswillseeaddiQonalincomeby2021

Ø In2021,thecity’seconomywilllose~$66mmineconomicacQvityduetoincreasedimportsandloweredexportsmiQgatedbyahigherconsumpQon.1,181DCresidentsmaylosetheirDCemployment

Ø  DCResidentEmploymentwillsufferroughlytwicethejoblossescomparedtoALLDCWorkers

Ø DC’sFoodandRetailindustrieswillbethemostaffected

Ø FromtheRegion’sperspecUve:Ø SurroundingCounQeswillbenefitmorethanDCfromthispolicysincemorethan55%ofaffectedworkersliveinMDorVA.

Ø DirectlyaffectedDCbusinessesmaybesignificantlylesscompeQQvethantheirMDandVAcounterparts

34

DCPrivateEmploymentJobLoss RelaUvetoAllDCPrivateWorkers(~618k) RelaUvetoAllDCMinimumWageWorkers(~167k)

(2,919)

(3,784) PessimisQcCase

(1,744)

(2,375) MostLikelyCase

29(171)

OpQmisQcCase

-2.50%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

(2,919)

(3,784) PessimisQcCase

(1,744)

(2,375) MostLikelyCase

29(171)

OpQmisQcCase

-0.70%

-0.60%

-0.50%

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

0.10%

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032 35

ImpactonDCPrivateResidentEmployment

RelaUvetoAllResidentPrivateWorkers(~345k) RelaUvetoResidentMinimumWageWorkers(~67k)

(1,848)

(3,033)

PessimisQcCase

(1,181)

(2,046)

MostLikelyCase

(120)(394)

OpQmisQcCase

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

(1,848)

(3,033)

PessimisQcCase

(1,181)

(2,046)

MostLikelyCase

(120)(394)

OpQmisQcCase

-1.20%

-1.00%

-0.80%

-0.60%

-0.40%

-0.20%

0.00%

0.20%

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032 36