January 2014

MINIMUM WAGE IN SAN JOSE:

Measuring the Impact on the Restaurant Industry

THE $10

Introduction

In March of 2013, the city of San Jose increased its minimum wage by 25 percent from $8 an hour to $10 an hour, creating the second highest local minimum wage in the state of California. (San Francisco, its neighbor to the north, had the highest at $10.55.)

The mandated wage increase was the result of a 2012 initiative on the ballot in San Jose. Students from San Jose State Universitywith financial and organizational assistance from the South Bay Labor Councilconceived of and campaigned for the ballot measure. The students and their supporters argued that the measure would boost the local economy by putting more money in the hands of lower-wage employees who would then spend it immediately.

They dismissed the arguments of economists and business groups that a mandated increase in labor costs could have unintended consequences such as higher prices or reduced employment. One labor-aligned research center affiliated with the University of California-Berkeley echoed the claim of economic stimulus in a policy paper. Understanding San Joses experience with a $10 minimum wage is important as Californias state minimum wage rises to that level over the next two years, as signatures are collected for a ballot initiative to create a $12-an-hour minimum wage, and as cities such as San Diego and San Francisco consider raising their minimum wages even higher.

MINIMUM WAGE IN SAN JOSE: Measuring the Impact on the Restaurant Industry

$10 Minimum Wage in San Jose Employment Policies Institute 3

THE $10

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Survey DescriptionThe wage increase in San Jose was unique in that the $2-per-hour bump happened all at oncethere was no phase in period as has occurred with past increases in the federal minimum wage. San Joses minimum wage will continue to rise with inflation in future years, but the single largest increase happened in year onesuggesting that the worst of the potential consequences, should they occur, would be clustered in this early period.

To gauge the impact of this one-shot 25 percent increase, the Employment Policies Institute (EPI) surveyed the citys restaurant industry during a one-month period at the end of 2013. EPI was specifically interested in the experience of businesses covered by the new law, so the restaurant industrygiven its opposition to the ballot initiative and concerns about consequencesseemed an ideal test group.

The California Restaurant Association provided EPI with a phone list for every restaurant it had recorded with a location in San Jose, yielding 1,209 unique phone records. (CRA did not provide financial support for this survey and was not involved in the data collection.) EPI contracted with a survey research firm to contact either an owner or hiring manager at each location for a brief survey about their experiences with the $2-an-hour increase.

Surveys were conducted over five days in December 2013 and on one day in January 2014, until the list of phone numbers was exhausted. The final results represent 163 locations, split roughly evenly between fast-food locations and table-service locations. (See table at right). The vast majority of respondents (85%) had fewer than 100 employees on staff at all locations. (See appendix for a full table of employer sizes.)

Because we surveyed every restaurant we had a record for in the city, and participation wasnt mandatory, its possible that restaurants that were unhappy with the law were more likely to participate. Additionally, responses could vary across industries.

Nevertheless, our resultswhich represent roughly 1 in 8 of San Joses restaurantssuggest that proponents of the $2 increase were not honest when they told San Jose residents that a wage hike to $10 an hour would occur without consequence. In the industry surveyed, the increased costs were significant, and employers took a number of steps to offset those costsincluding price increases, employment reductions, and even closed locations. Additionally, a number of employers indicated that they were limiting future expansion plans in the city.

ResultsBusiness CostsThough proponents of the minimum wage increase portrayed the added cost of the law as minimal, the higher minimum wage clearly brought with it considerable new costs for the citys restaurants. Asked to describe the increase in their total labor costs, two-

# %

Full Service 69 42.3%Quick Service 72 44.2%Other (Food Trucks, etc) 21 12.9%Refused 1 0.7%

Describing the Increase in Labor Costs from a $10 Minimum Wage

# %Big Increase 107 65.6%Small Increase 46 28.2%No Increase 7 4.3%Undecided or Refused 3 1.8%

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thirds of respondents said the higher minimum wage caused a big increase. Just four percent of surveyed employers that were affected by the law said it caused no increase in their labor costs.

EPI also asked affected businesses to quantify the additional cost of the new law on each location. The responses are given below. Notably, 40 percent of businesses described the added per-location cost as being between $10,000 per year and $69,000 per year. For a handful of businesses, the added cost exceeded $100,000 per location.

Adapting to New CostsBecause restaurant profit margins average between three and six percentmeaning the business keeps three to six cents in profit from each sales dollar after paying expensesnew labor costs from a $10 minimum wage would be expected to require cost offsets. Historically, thats either meant higher prices for customers or less customer service as businesses adapt by reducing work hours or staff levels. The results of this survey suggest that both occurred in San Jose.

Two-thirds of responding businesses raised their prices to adapt to the laws cost. Roughly 30 percent responded that they had limited future expansion plans in the city

as a consequence of the new law, and 12 restaurants had even closed locations in the city in response.

Employer Responses to a $10 Minimum Wage

Some of the consequences affected the employees in other ways. For instance, nearly 45 percent of respondents reduced employee hours to adapt to the cost, and 42 percent reduced staff levelseither the number of employees per shift or the overall number of employees at the restaurant.

Describe the Additional Per-Unit Cost from a $10 Minimum Wage

# %Under $10k 26 15.6%$10k - $29k 37 22.7%$30k - $49k 15 9.2%$50k - $69k 12 7.4%$70k - $89k 2 1.2%$90k - $100k 1 0.6%More than $100k 2 1.2%Undecided/Refused 68 41.7%

Increased Prices# %

Yes 108 66.3%No 53 33.5%Refused 2 1.2%

Reduced Employee Hours# %

Yes 73 44.8%No 88 54%Refused 2 1.2%

Reduced Staffing Levels# %

Yes 69 42.3%No 92 56.4%Refused 2 1.2%

Closed Locations in San Jose# %

Yes 12 7.4%No 148 90.8%Refused 3 1.8%

Limited Future Expansion Plans# %

Yes 49 30.1%No 90 55.2%Refused 24 14.7%

ConclusionsFurther study is necessary to determine whether theres a long-term impact of the $2 wage increase and the subsequent annual increases. Future studies using government data will be able to isolate whether there was an impact across industries. But taken together, these survey results suggest that the impact of a $10 minimum wage on a key service industry employer in San Jose was not nearly as innocuous as proponents claimed it would be.

ReferencesDavid Neumark and William Wascher. Minimum Wages. Cambridge: The MIT Press, 2008. Deloitte and National Restaurant Association. Restaurant Industry Operations Report: 2010 Edition. https://s3.amazonaws.com/s3.documentcloud.org/documents/291534/t288-nrarept2010.pdf

Distribution of Survey ResponsesFewer than 10 employees 18.4%10-49 employees 55.8%50-99 employees 10.4%100-499 employees 6.1%500-999 employees 1.2%1000 or more employees 3.7%Undecided/Refused 4.3%

Appendix 1: Business Size (All Locations) of Survey Respondents

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Appendix 2: Survey QuestionsPhone surveys were conducted by Connection Strategy over six different days in December 2013 and January 2014. Of the 1,209 records provided, 163 were contacted and completed the survey. An additional 79 respondents answered no to the first question, and were thus excluded due to the surveys focus on affected employers. 674 respondents were classified as refusals. The remainder were either unreachable or the number was not in service.

Question: Did you have to increase hourly pay for

anyone on your staff in response to this increase?

Question: Would you say that this $10 minimum

wage caused a big increase in your total labor costs, a small increase, or no increase?

Question: What best describes the additional cost

of the $10 minimum wage for each location of your business?

Question: In response to the $10 minimum wage,

have you raised your prices at locations in San Jose?

Question: In response to the $10 minimum wage,

have you reduced employees hours at locations in San Jose?

Question: In response to the $10 minimum wage,

have you reduced employees per shift or overall staffing levels at your locations in San Jose?

Question: In response to the $10 minimum wage,

have you closed any of your locations in San Jose?

Question: In response to the $10 minimum wage,

have you limited future expansion plans within the city of San Jose?

Question: Do you consider yourself a full-service

restaurant, a fast food restaurant, or something else?

Question: Which category best describes the size of

workforce at all locations (both inside and outside of San Jose)?

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1090 Vermont Avenue, NW Suite 800Washington, DC 20005www.EPIonline.orgTel: 202.463.7650Fax: 202.463.7107