April 2015 The Impact of a $15 Minimum Wage on Kansas City
ABOUT THE MISSOURI RESTAURANT ASSOCIATION The Missouri Restaurant Association (MRA) is a statewide trade association representing over 1,500 member establishments. The association s membership is diverse, and includes full-service luxury restaurants, hotels, institutions, fast-foods, schools, contract feeders, and ancillary foodservice such as in theme parks and sports stadiums. The association has been successful in securing support from virtually every segment of commercial feeding. MRA includes eight Chapters as extensions of the parent organization, each with its own Officers, Board of Directors, and limited budget. The association is governed by a Board of Directors comprised of five Officers, 33 Directors, and each President of the eight affiliated chapters. MRA is dedicated to serving the needs of the foodservice and hospitality industry, enhancing and improving its growth and development, assisting and educating its members in operating more effectively, improving the political and social environment in which the industry conducts business, for the benefit of its members, patrons, employees, and the well-being of the community. David A. Macpherson is the E.M. Stevens Professor of Economics at Trinity University. He received undergraduate and doctoral degrees in economics from Pennsylvania State University. Dr. Macpherson has published over 60 articles in leading economics and real estate journals including Review of Economics and Statistics, Industrial and Labor Relations Review, Journal of Labor Economics, Journal of Human Resources, and Journal of Real Estate Economics and Finance. His research has been funded by a variety of entities including the National Science Foundation, Florida Legislature, and the National Association of Realtors. He is co-author of the undergraduate labor economics text, Contemporary Labor Economics, as well as the principles of economics text, Economics: Private and Public Choice. He is included in Who s Who in Economics, Fourth Edition, which includes the 1,200 most frequently cited economists. 2
THE IMPACT OF A $15 MINIMUM WAGE ON KANSAS CITY April 2015 Economic Analysis by Dr. David Macpherson Trinity University Index Executive Summary 2 Results 3 Technical Appendix 6 3
EXECUTIVE SUMMARY Missouri s minimum wage of $7.65 is linked to rise in most years with the inflation rate. But in the state s largest city of Kansas City, the city council with the support of labor organizations has proposed nearly doubling that figure. Specifically, the Council proposal would initiate a 31 percent wage hike on September 1st, and then raise the city s minimum wage in four steps until it hits $15 an hour. Proponents have enthusiastically pointed to the benefits of the $15 policy, but there s been far less discussion of the costs involved. Early evidence from cities such as Seattle and San Francisco-- where businesses are raising prices, reducing employment, and even shutting their doors to adapt to a $15 minimum wage that s phasing in--suggest that extreme caution is necessary in pursuing a similar step in Kansas City. In this study, labor economist David Macpherson of Trinity University uses Census Bureau data to estimate the impact on Kansas City s labor market of raising the minimum wage to $15 an hour following the schedule proposed by the City Council. Dr. Macpherson s employment estimates follow the methodology used by the nonpartisan Congressional Budget Office in its 2014 report estimating the impact of a $10.10 minimum wage nationwide, which in turn relied on 60 different empirical studies to formulate its estimates. Citywide, he finds that over 3,200 jobs would be lost at the $15 wage level with 60 percent of those jobs being held by women. The job losses would hit the city s service industry particularly hard, with 36 percent of the employment impact clustered at restaurants, hotels, and similar businesses. These estimates should be considered conservative, particularly because Kansas City, MO, is right next door to Kansas City, KS where the minimum wage is $7.25 and isn t expected to change in the near future. A dramatic reduction in labor costs could be available for any entrepreneur willing to cross the state and city line. Raising wages is an admirable goal, but Kansas City can t afford a proposal that will put jobs out of reach for the employees it s trying to help. The evidence presented here suggests that a blunt wage mandate would do more harm than good. 4
RESULTS The minimum wage is one of the most hotly-debated topics in the political world. Some legislators claim that a higher base wage will stimulate the economy; others claim that it will reduce jobs when affected employers can t offset the higher costs through higher prices. Economists, who have studied the issue since the late 1940s, tend to take a skeptical view of minimum wage increases. Since the early 1990s, for instance, roughly 85 percent of the most credible research on the minimum wage points to job loss for less-skilled groups. The nonpartisan Congressional Budget Office (CBO), in an evaluation of President Obama s proposed $10.10 minimum wage increase, reviewed 60 different studies and concluded that the policy would eliminate 500,000 jobs if enacted. The estimates below, of the employment impact of a higher minimum wage on Kansas City s labor market, were performed by Dr. David Macpherson of Trinity University. Dr. Macpherson followed closely the methodology used by the CBO in its 2014 report where possible. Dr. Macpherson s methodology, which was adapted to estimate minimum wage impacts in a small geographic area, is presented in detail in a technical appendix. Citywide, Dr. Macpherson finds that increasing the minimum wage to $15 by 2020 would eliminate over 3,200 jobs in the city with 60 percent of those lost jobs held by women. Close to half of the employees affected are between the ages of 16 and 19. The bulk of the job losses would be concentrated among individuals with less than a college degree, and among people who work in the retail or leisure & hospitality industries. (Totals have slight discrepancies due to rounding.) Estimates by Gender Job Losses Male 1,284 Female 1,932 Estimates by Education Education Job Loss High School Graduate or Less 2,208 Some College, College Degree, Or Graduate 1,007 Estimates by Age Age Job Loss 16-19 1,522 20-24 499 25-30 311 31-40 312 41-50 209 51+ 362 Top Three Industries Affected Industry Job Loss Retail Trade 671 Arts, Entertainment, Recreation, Accommodations, and Food Services 1,144 5
TECHNICAL APPENDIX Estimating Employment Loss from an Increase in the Minimum Wage in Kansas City, Missouri. Dr. David Macpherson E.M. Stevens Professor of Economics Trinity University This paper describes how we estimate the employment loss from a proposed increase in the minimum wage to $15.00 on January 2020 in Kansas City, Missouri. Data and Sample We use data from the Current Population Survey (CPS) Outgoing Rotation Groups (ORG) from January 2013 through December 2014 and identify those who are in the Kansas City Core Based Statistical Area (KC-CBSA) and reside in Missouri. The Missouri portion of the KC-CBSA contains 13 counties. The minimum wage increase would apply only to workers inside of the City of Kansas City. Since the CPS does not separately identify residents of the city of Kansas City from those in the CBSA, we compute the percentage of the Missouri portion of the KC-CBSA that resides inside the city.[1] Our analysis of number of workers affected and cost is done for the entire CBSA and we multiply this by the percentage inside the city of Kansas City (34.2 percent). This assumes that the wage distribution and private/public status of workers within the KC-CBSA is similar for those inside and outside the city of Kansas City. Supporting this assumption, the American Fact Finder data for 2013 suggests that the average earnings of workers in the KC-CBSA are quite similar inside and outside of the city limits.[2] For each private sector worker in the sample, we estimate an hourly wage. The group of potentially affected workers is restricted to those private sector workers whose wage is at or above the minimum wage (less 25 cents) during the year of the sample survey. For example, in the 2014 data, since the minimum wage was $7.50, anyone earning at or above $7.25 is included in our group of potentially affected workers. To project the distribution of wages in 2020 without passage of the new legislation, we assume that every potentially affected worker has wage growth of 2.9 percent annually until 2020 and that the labor force will grow by 0.86 percent annually. This assumption is based on the CBO s own forecast of wage growth for low skill workers in their study of the employment effects of minimum wage hikes, and their projection of employment growth.[3] Also, given that Missouri indexes its minimum wages for inflation, we assume that the minimum wage would increase to $8.49 by 2020 based on the CBO forecast of inflation averaging 2.1 percent per year between 2015 and 2020.[4] For any worker who earned at or above the minimum in the year of the survey (2013 or 2014) and whose predicted wage in 2020 was below the projected minimum of $8.49, we increase their wage to $8.49. For workers who earned up to $.25 below the minimum in the year of the survey, we increase by the amount that the minimum wage increased. This means, for example, that a person who earned $.15 less than the minimum wage in 2014 would still earn $.15 below the new minimum in 2020. 1 We estimate the percentage of the KC-CBSA employed inside the city of Kansas City using 2013 employment statistics from the Census Bureau s Fact Finder. The data can be found at http://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml 2 Within the city of Kansas City, MO earnings average $54,069; and $52,702 for the KC-CBSA inside the state of Missouri. 3 The CBO report can be found at http://www.cbo.gov/sites/default/files/44995-minimumwage.pdf. See page 20. 6
TECHNICAL APPENDIX CONTINUED Estimating Affected Workers and Employment Loss After generating the forecast of the 2020 distribution of wages reflecting wage growth and the effects of indexing in Colorado on the minimum wage, we identify workers who would be affected by the new law mandating a $15.00 minimum as those with wages between the predicted minimum wage legislated for 2020 ($8.49) and the proposed minimum ($15). We also include those workers who were slightly below (up to $.25) below the old and new minimum. To estimate the number of affected workers, we estimate the number of affected workers for 2020 based on the 2014 data. Second, we use two years of data, we adjust the weights in the 2013 data so that the state-specific number of affected workers implied by the 2013 data matches that for 2014. This adjustment is designed to correct for the changing economic climate as the economy recovers from the great recession and to generate estimates that are as close as possible to the most recent data (2014). After we adjust the 2013 weights, we estimate the number of affected workers by summing their earnings weights and dividing the total by 24 (the number of months of data). To estimate employment loss, for each affected worker we compute: L = e *(Proposed Min Wage /Min Wage 2020 1) where e is an assumed elasticity of employment with respect to changes in the minimum wage, Min Wage 2020 is the minimum wage currently legislated for 2020 (which we estimate to be $8.49 with indexing), and Proposed Min Wage is the $15.00 minimum that is being proposed for 2020. To estimate the aggregate employment loss in the economy, we use earnings weights to sum L across workers. We also follow the Congressional Budget Office (2014) and use an elasticity of 0.15 for non-teenagers and 0.45 for teenagers. 4 The CBO forecast for inflation can be found at http://www.cbo.gov/sites/default/files/cbofiles/attachments/45066-2015-01-economicdataprojections2.xlsx 7