UC Berkeley News


Voter-approved boost in the minimum wage shown to add little to the cost of living well in San Francisco
Restaurant employment unaffected; menu prices increased only slightly during survey period

| 12 January 2006

San Francisco's economy is adjusting relatively well to a minimum wage law that has boosted the city's hourly minimum wage to the top of the national charts, according to researchers at the Institute of Industrial Relations.

San Francisco voters in 2003 approved one of the first citywide minimum-wage laws in the country, boosting hourly pay for an estimated 54,000 workers - 11 percent of the municipal workforce - to $8.50 an hour, up from the state's $6.75 an hour minimum wage and a federal minimum wage of $5.15 an hour.

Though many restaurateurs thought their dining rooms would empty out after San Francisco's minimum-wage policy changed, in fact few if any dining establishments suffered directly on its account.

The San Francisco law, which calls for annual cost-of-living adjustments, increased minimum pay to $8.62 an hour in January 2005, and $8.82 an hour starting Jan. 1 of this year. This year also marks the end of a two-year phase-in period, meaning that all city employers - even previously exempt nonprofit employers and businesses with fewer than 10 employees - must now comply with the minimum-wage mandate.

The Berkeley researchers examined San Francisco's pay rates, employment levels, prices, job tenure, and other workplace-related characteristics. Their conclusions, they say, bode well for a growing number of communities - including six others over the last three years - that are attempting minimum-wage increases.

Among their key findings:

. The new policy did not impact employment growth in affected businesses - primarily restaurants, where the fulltime employment increased and job tenure improved.

. Average prices for restaurant menu items increased slightly - approximately 3 cents on the dollar - relative to restaurants on the east side of San Francisco Bay.

. The percentage of workers earning less than $8.50 an hour in restaurants affected by the law declined substantially, while health-insurance coverage by those restaurant employers remained stable.

. The policy did not spur business closures.

In his "State of the State" address last week, Gov. Arnold Schwarzenegger announced a proposal to increase the statewide minimum wage from $6.75 an hour to $7.25 in September of this year, and to $7.75 in July 2007.

"The governor's proposal is an improvement over his past vetoes, but it will still leave the state minimum wage below the level in San Francisco and in the other states on the West Coast," said economics professor Michael Reich, director of the Institute of Industrial Relations and co-author of the study.

"If his proposal were to include indexing the minimum wage to inflation, it would make future changes more predictable and stable, which would work better for businesses and employees in California," he said.

As the value of the federal minimum wage, adjusted for inflation, continues to decline, the Berkeley researchers - who include research economist Arindrajit Dube and Suresh Naidu, a graduate student in economics - say that state and local minimum-wage policies probably will become more commonplace.

Meanwhile, they note that the characteristics of the low-wage workforce in the country's 50 largest cities resemble San Francisco's in terms of proportion and job types, suggesting similar impacts from new wage laws that might be enacted elsewhere.

One area of major difference, the researchers said, is the relatively high percentage of hotel workers in San Francisco's workforce, about twice that of the largest cities in the rest of the nation.

The researchers used a regression analysis to isolate the effect of San Francisco's new minimum wage by controlling for other factors, including inflation and the start of a regional economic recovery. They looked at the city's restaurant industry just before the law first took effect, and compared those data with its condition nine months later. They were able to compare restaurants in the city that were affected by the law with those that were not, as well as with restaurants in the East Bay.

The nine-month time frame, Dube said, was sufficient for the restaurant industry to adjust prices, lay off workers, and take other steps it felt necessary to deal with the new wage law.

A policy brief ("The Economics of Citywide Minimum Wages: The San Francisco Model"), along with other research into the minimum-wage issue, is online at www.iir.berkeley.edu/research/minimumwage.html.

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