1

Michael J. Chow

NFIB Research Foundation

Washington, DC

July 4, 2013

Economic Effects of a Massachusetts Minimum Wage Increase:

An Econometric Scoring of HB 1701

This report analyzes the potential economic impact of implementing the changes to Massachusetts

minimum wage laws contained in HB 1701 on private sector employment and production. HB 1701,

sponsored by Representative Antonio F.D. Cabral, would increase of the minimum wage in

Massachusetts to $10.00 per hour in 2014 and to $11.00 per hour in 2015. The bill also provides for

future increases in the Massachusetts minimum wage by tying it to increases in the Consumer Price

Index. The long-run effect of the legislation would be the destruction of jobs and economic

production in the state of Massachusetts. Depending upon the rate of inflation in future years,

implementation of HB 1701 could result in over 62,000 lost jobs in Massachusetts over a ten-year

period and a cumulative reduction in real output of nearly $45 billion over that same time period.

More than 56 percent of the lost jobs would be jobs from the small business sector of the economy.

2

Introduction

Employers in all fifty states are required to offer workers a minimum wage in exchange for their

labor. The primary federal statute in the area of minimum wages is the Fair Labor Standards Act

(FLSA) of 1938 which, as amended, establishes a basic minimum wage that must be paid to

covered workers. The current federal minimum wage is $7.25 per hour. States are permitted to

establish their own minimum wages which have the potential to replace the federal rate as the

basic minimum wage, provided that the state minimum wage established exceeds the federal rate.

The effective minimum wage in the state of Massachusetts is currently $8.00 (Table 1).

Table 1: Historical State Minimum Wage Rates for Massachusetts

Year Minimum Wage Year Minimum Wage

1972 $1.75 (per hour) 1993 $4.25

1973 $1.75 1994 $4.25

1974 $1.75 1995 $4.25

1975 $1.75 1996 $4.75

1976 $2.10 1997 $5.25

1977 $2.10 1998 $5.25

1978 $2.10 1999 $5.25

1979 $2.90 2000 $6.00

1980 $3.10 2001 $6.75

1981 $3.35 2002 $6.75

1982 $3.35 2003 $6.75

1983 $3.35 2004 $6.75

1984 $3.35 2005 $6.75

1985 $3.35 2006 $6.75

1986 $3.35 2007 $7.50

1987 $3.35 2008 $8.00

1988 $3.65 2009 $8.00

1989 $3.65 2010 $8.00

1990 $3.65 2011 $8.00

1991 $3.75 2012 $8.00

1992 $4.25 2013 $8.00

Source: Department of Labor

Currently, approximately 62,000 workers in Massachusetts earn at or below the minimum

wage. Despite an increase of 18.5 percent in the Massachusetts minimum wage over the past

decade, state legislators continue to push for additional increases. The most recent attempt in

Massachusetts takes the form of HB 1701, a bill sponsored by Representative Antonio F.D.

Cabral. If passed, the bill would increase the state minimum wage to $10.00 per hour in 2014,

$11.00 per hour in 2015, and tie minimum wage increases in subsequent years to inflation as

measured by the Consumer Price Index (CPI).

3

This brief report quantifies the potential economic impact implementation of HB 1701

could have on Massachusetts small businesses and their employees by using the Business Size

Insight Module (BSIM). The BSIM is a dynamic, multi-region model based on the Regional

Economic Models, Inc. (REMI) structural economic forecasting and policy analysis model which

integrates input-output, computable general equilibrium, econometric, and economic geography

methodologies. It has the unique ability to forecast the economic impact of public policy and

proposed legislation on different categories of U.S. businesses differentiated by employee-size-

of-firm. Forecast variables include levels of private sector employment and real output. By

comparing simulation results for scenarios which include proposed or yet-to-be-implemented

policy changes with the model’s baseline forecast, the BSIM is able to obtain estimates of how

these policy changes could impact employer firms and their employees.1

Description of New Employer Costs Under HB 1701

Minimum wage increases raise the cost of labor for employers.2 HB 1701 is no exception to this

rule. Increases to the Massachusetts minimum wage constitute a direct increase in employer

costs. Assuming passage of the legislation in 2013, the bill would increase the minimum wage to

$10.00 per hour in 2014 and $11.00 per hour in 2015. Annual adjustments in future years would

be linked to increases in the cost of living as measured by the CPI.

The precise amount of additional wages employers must pay under HB 1701 is uncertain

since future wage increases depend upon future (unknown) cost of living adjustments (COLA).

Due to this uncertainty, the analysis in this report relies on a set of three different COLA paths

which, with the assistance of the BSIM, provide a range of potential employment and production

effects resulting from HB 1701’s implementation. Table 2 and Figure 1 present historical

annual rates of inflation over the past 20 years as measured by CPI-U and CPI-W, two different

measures of the Consumer Price Index.3 As the rates in the table indicate, annual rates of

inflation over the past two decades have almost universally fallen between zero percent and four

percent. Exceptions include the annual rate of increase for CPI-W in 2007 when gasoline prices

increased by more than 30 percent during the year, and 2008 (for both CPI-U and CPI-W) when

firms cut prices dramatically in response to the financial crisis and the associated Great

1 The REMI model is used by a diverse group of clients spanning academia, private consulting firms, local and

regional governments, and nonprofits, to name a few categories. A sample of clients include the Massachusetts

Institute of Technology, the AARP, the Urban Institute, and the Florida legislature. What distinguishes the BSIM

from the REMI models employed by other users is the ability of the BSIM to generate results differentiated by

employee-size-of-firm. 2 Good overviews of the literature on the minimum wage can be found in:

Brown, Charles, Curtis Gilroy, and Andrew Cohen, “The Effect of the Minimum Wage on Employment and

Unemployment: A Survey,” NBER Working Paper No. 846, January 1982;

Neumark, David and William Wascher, “Minimum Wages, Labor Market Institutions, and Youth Employment:

A Cross-National Analysis,” Industrial and Labor Relations Review, Vol. 57, No. 2, January 2004. 3 CPI-U is a measure of the Consumer Price Index based upon the basket of goods and services for all urban

consumers. CPI-W is a measure of the Consumer Price Index based upon the basket of goods and services for all

urban wage and clerical workers.

4

Recession as consumer demand plummeted. The ten-year average annual rate of inflation for the

most recent ten years is 2.16 percent for CPI-U and 2.20 percent for CPI-W.

Using these historical inflation rates as guidance, the three COLA paths chosen for this

analysis were a path with no increases in the cost of living in future years, a path with two

percent annual increases in the cost of living, and a path with four percent annual increases in the

cost of living. These three paths, given historical rates of increases in the cost of living, can

reasonably be expected to include within their range the actual, realized path of future cost of

living adjustments. Table 3 presents the hypothetical paths the Massachusetts minimum wage

would take under these three scenarios assuming that HB 1701 is implemented beginning in

2014.

Table 2: Historical Rates of Annual Inflation as Measured by the Consumer Price Index

Year CPI-U CPI-W 1993 2.45% 2.28%

1994 2.60% 2.64%

1995 2.26% 2.23%

1996 2.84% 2.83%

1997 1.51% 1.28%

1998 1.48% 1.45%

1999 2.49% 2.60%

2000 3.13% 3.13%

2001 1.03% 0.70%

2002 2.31% 2.30%

2003 1.59% 1.34%

2004 2.90% 3.02%

2005 3.39% 3.47%

2006 1.91% 1.69%

2007 3.94% 4.28%

2008 -0.37% -1.00%

2009 2.55% 3.17%

2010 1.37% 1.52%

2011 2.75% 2.98%

2012 1.55% 1.50%

Source: Bureau of Labor Statistics

5

Figure 1

Table 3: Future Massachusetts Minimum Wage Trajectories Under Different Cost of

Living Adjustment Paths

Year

Hypothetical

Minimum Wage

Schedule,

0 Percent COLA Path

Hypothetical

Minimum Wage

Schedule,

2 Percent COLA Path

Hypothetical

Minimum Wage

Schedule,

4 Percent COLA Path 2013 $8.00 $8.00 $8.00

2014 $10.00 $10.00 $10.00

2015 $11.00 $11.00 $11.00

2016 $11.00 $11.22 $11.44

2017 $11.00 $11.44 $11.90

2018 $11.00 $11.67 $12.37

2019 $11.00 $11.91 $12.87

2020 $11.00 $12.14 $13.38

2021 $11.00 $12.39 $13.92

2022 $11.00 $12.64 $14.48

2023 $11.00 $12.89 $15.05

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%Historical Rates of Change in the CPI

CPI-U

CPI-W

Source: Bureau of Labor Statistics

6

Larger increases in cost of living adjustments translate to larger increases from the status

quo minimum wage, leading to larger additional employer costs in future years. The additional

per-employee wage burdens shouldered by employers in future years are presented in Table 4 in

percentage terms. Assuming zero percentage change to the cost of living in future years, the

increase of the minimum wage to $11.00 per hour in 2015 represents a 37.5 percent increase in

the minimum wage from today’s level. In contrast, constant cost of living adjustments of two

percent annually will result in a minimum wage in 2023 that is 61.1 percent higher than it is

today. Constant cost of living adjustments of four percent annually will result in a minimum

wage in 2023 that is 88.2 percent higher than it is today.

Table 4: Per-Employee Percentage Increase in Minimum Wage (Compared to Status Quo)

Under Different Cost of Living Adjustment Paths

Year

Hypothetical

Minimum Wage

Schedule,

0 Percent COLA Path

Hypothetical

Minimum Wage

Schedule,

2 Percent COLA Path

Hypothetical

Minimum Wage

Schedule,

4 Percent COLA Path 2014 25.0% 25.0% 25.0%

2015 37.5% 37.5% 37.5%

2016 37.5% 40.3% 43.0%

2017 37.5% 43.1% 48.7%

2018 37.5% 45.9% 54.7%

2019 37.5% 48.8% 60.9%

2020 37.5% 51.8% 67.3%

2021 37.5% 54.8% 74.0%

2022 37.5% 57.9% 80.9%

2023 37.5% 61.1% 88.2%

In annual terms, the proposed minimum wage increases amount to thousands of dollars in

additional costs per employee. This is demonstrated through the joint use of the hypothetical

wage schedules provided in Table 3 and data from the Bureau of Labor Statistics regarding the

typical number of hours worked per week (on a primary job) for hourly wage earners.

Extrapolating from data on the usual amount of hours worked per week on a primary job, hourly

wage earners work approximately 27.6 hours per week.4 Assuming minimum wage workers

work 48 weeks per year, a three dollar increase in the minimum wage, which would transpire

between now and 2015, amounts to a roughly $4,000 per year increase in the cost of a minimum

wage earner’s labor.5 If inflation follows a path over the next ten years similar to the path it

followed in the most recent ten years, then the cost of labor could increase by over $6,000 per

year per minimum wage employee.6 The increased wage costs discussed above were modeled

4 “Characteristics of Minimum Wage Workers: 2012,” Table 9, Bureau of Labor Statistics.

5 $3.00 per hour x 27.6 hours per week x 48 weeks per year = $3,974 per year.

6 $11.00 per hour x (1 + (0.0214 + 0.0220) / 2)

8 x 27.6 hours per week x 48 weeks per year = $17,303 per year in

2023. Current annual earnings = $8.00 per hour x 27.6 hours per week x 48 weeks per year = $10,598. $17,303 -

$10,598 = $6,705.

7

for the ten-year forecast period spanning 2014 to 2023 and inputted into the BSIM under the

“Wage Labor Cost” variable.

An important aspect of modeling minimum wage increases is “tipped” employees.

According to the U.S. Department of Labor (DOL), tipped employees are employees who

“customarily and regularly receive more than $30 per month in tips.”7 Employers may use tips

received by such employees as a credit against their minimum wage obligations to the employees,

provided that a minimum cash wage, currently set to $2.13 per hour at the federal level, is also

paid to the employees. States have the option of establishing their own cash wage.

Massachusetts’s cash wage is currently $2.63, fifty cents higher than the federal level, and equal

to approximately 33 percent of the current minimum wage.8 HB 1701 would adjust the

Massachusetts cash wage so that it equals 70 percent of the minimum wage. This adjustment

means that the cash wage in Massachusetts would equal $7.00 in 2014, a 166% increase from its

current level. Since HB 1701 would make the cash wage proportionate to the minimum wage,

future increases in the cash wage would also be tied to increases in the Consumer Price Index.

Assuming positive future inflation, cash wages beyond 2015 can also be expected to increase

regularly on an annual basis.

A second issue a modeler must concern himself with when modeling an increase in the

state minimum wages is business size exemptions. Some states exempt businesses of a certain

size from minimum wage requirements. The state of Illinois, for example, exempts employer

firms with three or fewer employees from minimum wage laws. No such exemptions exist for

the state of Massachusetts, and all employer firms in the state are therefore assumed to be

affected by HB 1701.

A third issue takes the form of potential “emulation effects” associated with individuals

earning near (just above) the minimum wage. Individuals now earning between $8.00 per hour

and $10.00 per hour will see their wages raised automatically to $10.00 per hour in 2014 and

$11.00 in 2015 if the bill passes, although their wages may increase to even higher levels if

employers attempt to maintain the pre-implementation wage structure. Other workers currently

earn just slightly above $11.00 per hour and despite not being affected directly by the legislation,

can be expected to pressure their employers for a raise in order to maintain the wage premium

between them and the lowest-earning individuals in the economy. Failure to increase the wages

of near-minimum-wage earners allows wage compression to occur and may result in workers

expressing their dissatisfaction by reducing work effort or leaving. Research suggests that

“relative wages are important to workers,” and “firms may find it in their profit-maximizing

interest to increase [near-minimum-wage] workers’ wages when minimum wages increase, in an

7 For detailed information on tipped employees, a useful resource is the DOL fact sheet available here:

http://www.dol.gov/whd/regs/compliance/whdfs15.pdf. 8 A good source for information on mandated cash wages paid to tipped employees by state is the National

Restaurant Association’s minimum wage map, available at

http://www.restaurant.org/Downloads/PDFs/advocacy/maps/map_minwage_rates.

8

attempt to restore work effort.”9 These effects are also referred to as “spill over” effects in the

minimum wage literature.10

For the modeler, a key concern involves estimating how many workers can be expected

to contribute to such emulation effects. Based upon state-level data from the Bureau of Labor

Statistics, it was estimated that 15 percent of Massachusetts’s private sector employees less those

individuals directly affected by HB 1701 would also see per worker raises equal to the dollar

amount in wage increases experienced by workers earning at the minimum wage (equivalent to a

$2.00 per hour increase effective in 2014).11

Future wage increases for these workers are

assumed to occur simultaneously with the future scheduled increases in the minimum wage

according to the wage schedules provided in Table 3.12

Besides the direct cost of higher wages in an increased minimum wage scenario, there are

significant additional employer costs in the form additional payroll taxes and workers’

compensation premiums that must be paid on wage differentials. In general, an employer’s share

of payroll taxes equals 7.65 percent of employee wages and salary. Of this 7.65 percent, 6.2

percentage points are intended to fund old age, survivors, and disability insurance, and 1.45

percentage points go to paying for Medicare hospital insurance. Employers in all three modeled

scenarios can expect to pay more in payroll taxes as a consequence of a minimum wage increase.

Additionally, since workers’ compensation premiums are typically tied directly to the total

amount of an employer’s payroll, employers in all three scenarios can expect to pay more in

workers’ compensation costs. For this analysis, it was assumed that additional workers’

compensation costs would grow according to the historical ratio between workers’ compensation

and wages and salary, a ratio with a percentage equivalent of approximately 2.0 percent

according to 2013 data from the Bureau of Labor Statistics.13

9 Grossman, Jean Baldwin, “The Impact of the Minimum Wage on Other Wages,” The Journal of Human Resources,

Vol. 18, No. 3 (Summer 1983). 10

“The Minimum Wage,” FRBSF Economic Letter, The Federal Reserve Bank of San Francisco, October 11, 1996. 11

According to the Bureau of Labor Statistics, Massachusetts wage earners at the 10th

percentile earn $9.60 per hour,

while those at the 25th

percentile earned $13.17 per hour. Emulation effects can be assumed to occur among workers

who earn near (within a few dollars of) the minimum wage. Workers at the 15th

percentile currently earn less than

four dollars more than the proposed new minimum wage level and can reasonably be expected to press for the

restoration of the original wage structure. It is assumed that emulation effects do not occur for workers earning

above the 15th

percentile. For workers earning at or below the 15th

percentile, it is assumed that per-hour wages

increase by $2.00 in 2014, an additional $1.00 in 2015, and increase in future years according to the assumed rate of

inflation as measured by the Consumer Price Index. 12

The assumption that wage changes due to emulation effects occur simultaneously with the minimum wage

increase is supported by research suggesting that “any substantial emulation effects are not long delayed, which

seems plausible because increases in the minimum are [typically] well-advertised in advance.” See Gramlich,

Edward M., “Impact of Minimum Wages on Other Wages, Employment, and Family Incomes,” Brookings Papers

on Economic Activity, The Brookings Institution, 1974, downloadable at:

http://www.brookings.edu/~/media/projects/bpea/1976%202/1976b_bpea_gramlich_flanagan_wachter.pdf. 13

According to March 2013 data from the Bureau of Labor Statistics, the typical civilian worker earned $21.50 in

wages and salary per hour and incurred workers’ compensation costs of $0.42 per hour. Dividing $0.42 by $21.50

yields the 2.0 percentage equivalent stated above. See “Employer Costs for Employee Compensation – March 2013,”

Bureau of Labor Statistics, released June 12, 2013.

9

No Changes to Government Demand

Given that a mandated minimum wage has been in effect for decades, it is assumed that

government mechanisms to monitor compliance with the statute are established and well-

developed. An increase in the minimum wage therefore should not require the development of

new government mechanisms or materially increase government administrative costs. Therefore,

there are no projected increases in government demand resulting from the implementation of HB

1701.

Additional Private Spending in the Economy

The costs described above were modeled for the three inflation path scenarios (zero percent

inflation, two percent inflation, and four percent inflation) for a forecast window spanning years

2014 to 2023. Since costs described in this analysis derive from an increase in the minimum

wage, the costs were inputted into the BSIM under the “Wage Labor Cost” variable. The costs

were distributed across different industry categories and different employee-size-of-business

categories according to existing industry and business size distributions published in the Census

Bureau’s Statistics on U.S. Businesses dataset. This distribution allows the BSIM to generate

results for separate employee-size-of-firm categories.

Increases in the “Wage Labor Cost” variable in the BSIM translate directly to increases in

the “Compensation Rate” policy variable which is used in intermediate calculations during the

simulation process. During simulations, such compensation rate increases are directly “fed back”

into the economy in the form of higher consumer spending on the part of workers who now have

extra money to spend. Such dynamics are important in a minimum wage simulation since it is

believed that during cases involving the transfer of wealth to lower-earning individuals, there is a

strong likelihood that these individuals will elect to spend the additional wealth in the short run

(rather than save), producing a temporary consumption-fueled boost to the economy.14

Concerns that minimum wage increases may provide a countervailing spending “stimulus” effect

to the economy are therefore satisfied in this analysis.

14

According to the Congressional Budget Office, “increases in disposable income are likely to boost purchases more

for lower-income than for higher-income households. That difference arises, at least in part, because a larger share

of people in lower-income households cannot borrow as much money as they would wish in order to spend more

than they do currently.” See: “The Economic Outlook and Fiscal Policy Choices: Statement of Douglas W.

Elmendorf, before the Committee on the Budget, United States Senate,” Congressional Budget Office, September 28,

2010, p. 36.

10

Simulation Results

BSIM simulation results for the three modeled scenarios are provided below. The unit for all

employment figures is number of employees, while output figures are presented in billions of

dollars. Job losses forecast in year 2023 range from approximately 38,000 to 63,000. In all three

scenarios, the small business sector is projected to shoulder at least 56 percent of the job losses.

Estimates of the reduction in real output15

from its baseline in year 2023 range from

approximately $4.9 billion to $8.3 billion. The results suggest that the cumulative reduction in

real output between 2014 and 2023 could exceed $44.9 billion.

Simulation Results for a Minimum Wage Increase with a Zero Percent COLA Path

For the scenario of a minimum wage increase with no assumed future cost of living adjustments,

the BSIM forecasts that there will be approximately 38,000 fewer jobs in 2023 due to the

implementation of HB 1701 (Table 5). More than 58 percent of the jobs lost in the zero percent

inflation scenario are in the small business sector (using the Small Business Administration’s

definition (employer firms with fewer than 500 employees)). In addition, Massachusetts gross

domestic product is forecast to be more than $4.8 billion less in 2023 compared to the baseline

scenario (in which no minimum wage increase takes place) (Table 6).

Table 5: Employment Difference from Baseline (Number of Employees), Zero Percent Cost of

Living Increase Path

Firm Size 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Percent

of Total

(2023)

1-4

Employees -218 -612 -1,106 -1,611 -2,062 -2,442 -2,747 -2,980 -3,148 -3,259 8.5% 5-9

Employees -300 -744 -1,235 -1,717 -2,137 -2,483 -2,756 -2,961 -3,104 -3,198 8.4% 10-19

Employees -393 -942 -1,527 -2,098 -2,593 -3,001 -3,318 -3,554 -3,718 -3,827 10.0% 20-99

Employees -711 -1,698 -2,743 -3,748 -4,610 -5,314 -5,850 -6,237 -6,492 -6,651 17.4% 100-499

Employees -610 -1,515 -2,419 -3,232 -3,903 -4,429 -4,828 -5,101 -5,276 -5,378 14.1% 500 +

Employees -2,231 -5,429 -8,354 -10,759 -12,627 -13,999 -14,952 -15,531 -15,822 -15,912 41.6% < 20

Employees -911 -2,298 -3,868 -5,426 -6,792 -7,926 -8,821 -9,495 -9,970 -10,284 26.9% < 100

Employees -1,622 -3,996 -6,611 -9,174 -11,402 -13,240 -14,671 -15,732 -16,462 -16,935 44.3% < 500

Employees -2,232 -5,511 -9,030 -12,406 -15,305 -17,669 -19,499 -20,833 -21,738 -22,313 58.4%

All Firms -4,463 -10,940 -17,384 -23,165 -27,932 -31,668 -34,451 -36,364 -37,560 -38,225 100.0%

15

The term “output” refers to the aggregate output of the Massachusetts economy (MA gross domestic product

(GDP)). GDP has three possible definitions: (1) the value of final goods and services produced in an economy

during a given period (as opposed to raw materials or intermediate goods which are produced or sourced earlier in

the production process), (2) the sum of value added during a given period, or (3) the sum of incomes in the economy

during a given period. It is a technical term whose significance may be better understood by the reader if she

considers that because of the first definition, output serves as a rough proxy for sales.

11

Table 6: Real Output Difference from Baseline ($Billions), Zero Percent Cost of Living Increase Path

Firm Size 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Percent of Total

(2023)

1-4

Employees -0.028 -0.08 -0.142 -0.203 -0.258 -0.303 -0.339 -0.367 -0.386 -0.398 8.2%

5-9

Employees -0.029 -0.079 -0.135 -0.19 -0.238 -0.278 -0.309 -0.332 -0.348 -0.359 7.4%

10-19

Employees -0.035 -0.094 -0.16 -0.224 -0.28 -0.325 -0.361 -0.386 -0.404 -0.415 8.5%

20-99

Employees -0.07 -0.186 -0.315 -0.437 -0.542 -0.628 -0.693 -0.74 -0.768 -0.785 16.2%

100-499

Employees -0.08 -0.21 -0.339 -0.455 -0.551 -0.625 -0.681 -0.718 -0.741 -0.754 15.5%

500 +

Employees -0.249 -0.655 -1.052 -1.383 -1.648 -1.846 -1.987 -2.077 -2.127 -2.146 44.2%

< 20

Employees -0.092 -0.253 -0.437 -0.617 -0.776 -0.906 -1.009 -1.085 -1.138 -1.172 24.1%

< 100

Employees -0.162 -0.439 -0.752 -1.054 -1.318 -1.534 -1.702 -1.825 -1.906 -1.957 40.3%

< 500

Employees -0.242 -0.649 -1.091 -1.509 -1.869 -2.159 -2.383 -2.543 -2.647 -2.711 55.8%

All Firms -0.491 -1.304 -2.143 -2.892 -3.517 -4.005 -4.370 -4.620 -4.774 -4.857 100.0%

Simulation Results for a Minimum Wage Increase with a Two Percent COLA Path

For the scenario of a minimum wage increase with an assumed future cost of living adjustment

path of two percent annually, the BSIM forecasts that there will be more than 50,000 fewer jobs

in 2023 due to the implementation of HB 1701 (Table 7). More than 57 percent of the jobs lost

in the two percent inflation scenario are in the small business sector. In addition, Massachusetts

gross domestic product is forecast to be more than $6.5 billion less in 2023 compared to the

baseline scenario (in which no minimum wage increase takes place) (Table 8).

Table 7: Employment Difference from Baseline (Number of Employees), Two Percent Cost of

Living Increase Path

Firm Size 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Percent

of Total

(2023)

1-4

Employees -218 -612 -1,121 -1,665 -2,195 -2,675 -3,105 -3,484 -3,807 -4,086 8.2%

5-9

Employees -300 -744 -1,259 -1,792 -2,296 -2,750 -3,156 -3,509 -3,810 -4,070 8.1%

10-19

Employees -393 -942 -1,562 -2,193 -2,784 -3,329 -3,806 -4,221 -4,575 -4,885 9.8%

20-99

Employees -711 -1,698 -2,806 -3,935 -4,988 -5,938 -6,774 -7,489 -8,099 -8,626 17.2%

100-499

Employees -610 -1,515 -2,472 -3,396 -4,236 -4,982 -5,638 -6,192 -6,662 -7,068 14.1%

500 +

Employees -2,231 -5,429 -8,552 -11,372 -13,820 -15,914 -17,698 -19,155 -20,353 -21,358 42.6%

< 20

Employees -911 -2,298 -3,942 -5,650 -7,275 -8,754 -10,067 -11,214 -12,192 -13,041 26.0%

< 100

Employees -1,622 -3,996 -6,748 -9,585 -12,263 -14,692 -16,841 -18,703 -20,291 -21,667 43.3%

< 500

Employees -2,232 -5,511 -9,220 -12,981 -16,499 -19,674 -22,479 -24,895 -26,953 -28,735 57.4%

All Firms -4,463 -10,940 -17,772 -24,353 -30,319 -35,588 -40,177 -44,050 -47,306 -50,093 100.0%

12

Table 8: Real Output Difference from Baseline ($Billions), Two Percent Cost of Living Increase Path

Firm Size 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Percent of Total

(2023)

1-4

Employees -0.028 -0.08 -0.144 -0.211 -0.276 -0.336 -0.389 -0.437 -0.478 -0.514 7.9%

5-9

Employees -0.029 -0.079 -0.138 -0.199 -0.257 -0.309 -0.357 -0.398 -0.435 -0.466 7.2%

10-19

Employees -0.035 -0.094 -0.163 -0.234 -0.3 -0.362 -0.417 -0.464 -0.505 -0.542 8.3%

20-99

Employees -0.07 -0.186 -0.321 -0.458 -0.587 -0.704 -0.807 -0.897 -0.974 -1.042 16.0%

100-499

Employees -0.08 -0.21 -0.347 -0.479 -0.6 -0.707 -0.804 -0.885 -0.956 -1.018 15.6%

500 +

Employees -0.249 -0.655 -1.075 -1.46 -1.803 -2.102 -2.362 -2.581 -2.767 -2.928 45.0%

< 20

Employees -0.092 -0.253 -0.445 -0.644 -0.833 -1.007 -1.163 -1.299 -1.418 -1.522 23.4%

< 100

Employees -0.162 -0.439 -0.766 -1.102 -1.42 -1.711 -1.97 -2.196 -2.392 -2.564 39.4%

< 500

Employees -0.242 -0.649 -1.113 -1.581 -2.02 -2.418 -2.774 -3.081 -3.348 -3.582 55.0%

All Firms -0.491 -1.304 -2.188 -3.041 -3.823 -4.520 -5.136 -5.662 -6.115 -6.510 100.0%

Simulation Results for a Minimum Wage Increase with a Four Percent COLA Path

For the scenario of a minimum wage increase with an assumed future cost of living adjustment

path of four percent annually, the BSIM forecasts that there will be more than 62,000 fewer jobs

in 2023 due to the implementation of HB 1701 (Table 9). More than 56 percent of the jobs lost

in the four percent inflation scenario are in the small business sector. In addition, Massachusetts

gross domestic product is forecast to be more than $8.3 billion less in 2023 compared to the

baseline scenario (in which no minimum wage increase takes place) (Table 10).

Table 9: Employment Difference from Baseline (Number of Employees), Four Percent Cost of

Living Increase Path

Firm Size 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Percent

of Total

(2023)

1-4

Employees -218 -612 -1,137 -1,726 -2,322 -2,905 -3,468 -3,995 -4,486 -4,944 7.9%

5-9

Employees -300 -744 -1,283 -1,866 -2,451 -3,016 -3,559 -4,072 -4,544 -4,988 7.9%

10-19

Employees -393 -942 -1,588 -2,289 -2,984 -3,658 -4,307 -4,912 -5,471 -5,998 9.5%

20-99

Employees -711 -1,698 -2,869 -4,120 -5,369 -6,580 -7,736 -8,811 -9,817 -10,759 17.1%

100-499

Employees -610 -1,515 -2,523 -3,563 -4,581 -5,562 -6,485 -7,339 -8,143 -8,899 14.1%

500 +

Employees -2,231 -5,429 -8,753 -11,981 -15,032 -17,892 -20,570 -23,003 -25,228 -27,318 43.4%

< 20

Employees -911 -2,298 -4,008 -5,881 -7,757 -9,579 -11,334 -12,979 -14,501 -15,930 25.3%

< 100

Employees -1,622 -3,996 -6,877 -10,001 -13,126 -16,159 -19,070 -21,790 -24,318 -26,689 42.4%

< 500

Employees -2,232 -5,511 -9,400 -13,564 -17,707 -21,721 -25,555 -29,129 -32,461 -35,588 56.6%

All Firms -4,463 -10,940 -18,153 -25,545 -32,739 -39,613 -46,125 -52,132 -57,689 -62,906 100.0%

13

Table 10: Real Output Difference from Baseline ($Billions), Four Percent Cost of Living Increase

Path

Firm Size 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Percent of Total

(2023)

1-4

Employees -0.028 -0.08 -0.147 -0.221 -0.296 -0.369 -0.441 -0.51 -0.575 -0.638 7.7%

5-9

Employees -0.029 -0.079 -0.14 -0.207 -0.274 -0.34 -0.405 -0.467 -0.525 -0.58 7.0%

10-19

Employees -0.035 -0.094 -0.166 -0.244 -0.322 -0.399 -0.474 -0.545 -0.612 -0.676 8.1%

20-99

Employees -0.07 -0.186 -0.327 -0.479 -0.633 -0.783 -0.929 -1.066 -1.196 -1.321 15.9%

100-499

Employees -0.08 -0.21 -0.354 -0.503 -0.651 -0.795 -0.932 -1.06 -1.184 -1.304 15.7%

500 +

Employees -0.249 -0.655 -1.098 -1.536 -1.959 -2.363 -2.752 -3.113 -3.455 -3.784 45.6%

< 20

Employees -0.092 -0.253 -0.453 -0.672 -0.892 -1.108 -1.32 -1.522 -1.712 -1.894 22.8%

< 100

Employees -0.162 -0.439 -0.78 -1.151 -1.525 -1.891 -2.249 -2.588 -2.908 -3.215 38.7%

< 500

Employees -0.242 -0.649 -1.134 -1.654 -2.176 -2.686 -3.181 -3.648 -4.092 -4.519 54.4%

All Firms -0.491 -1.304 -2.232 -3.190 -4.135 -5.049 -5.933 -6.761 -7.547 -8.303 100.0%

14

Figure 2

Figure 3

58.4% 57.4% 56.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% COLA Path 2% COLA Path 4% COLA Path

Small Business Share of Job Losses in Year 2023

55.8% 55.0% 54.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% COLA Path 2% COLA Path 4% COLA Path

Small Business Share of Lost Production in Year 2023

15

Appendix: Remarks Concerning Alleged Counterfactual Evidence Regarding

Minimum Wage Effects on Employment

Research on the economic effects of minimum wage policy consists of a rich literature spanning

decades. This body of literature includes studies whose results contradict the basic economic

principle of the law of demand, suggesting that increases in the minimum wage have no impact

on low-wage employment and may even have a modest positive effect. This section discusses

two popular studies within this counterfactual literature and notes certain methodological

problems which introduce uncertainty with respect to their findings.

A controversial and well-cited study on the minimum wage dating from the mid-1990s is

Card and Krueger’s investigation of the impact of the April 1, 1992 increase in the New Jersey

minimum wage from $4.25 to $5.05 per hour.16

Card and Kruger used a telephone survey to

compare the experiences of 410 fast-food restaurants in New Jersey and Pennsylvania—331 in

New Jersey and 79 in eastern Pennsylvania—following the increase in New Jersey’s minimum

wage. The Pennsylvania restaurants included in the survey served as a control group with which

New Jersey restaurants (and their experiences) could be compared since, in the authors’ opinions,

“New Jersey is a relatively small state with an economy that is closely linked to nearby states”

and no contemporary increase in Pennsylvania’s minimum wage occurred during the time period

studied. In summarizing their findings, the authors claim to have found “no evidence that the

rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state.”

Contrary to conventional wisdom, the authors even found “that the increase in the minimum

wage increased employment.” In a follow-up study using different data (from the Bureau of

Labor Statistics), the authors moderated their conclusion to the following: “The increase in New

Jersey’s minimum wage probably had no effect on total employment in New Jersey’s fast-food

industry, and possibly had a small positive effect.”17

The motivation for Card and Kruger’s follow-up study stems from criticism of the

methodology employed in the authors’ first study. In particular, concerns about noisy

measurement, the unit of measure investigated (critics claimed that the study’s focus should have

been the number of hours worked by employees, not the number of employees itself), and

inconsistencies between Card and Kruger’s data set and actual payroll data from fast-food

establishments in New Jersey and Pennsylvania incentivized the authors to perform subsequent

research. These points aside, other criticisms can be made about Card and Kruger’s analysis.

First, the authors focused on a relatively small geographic area. Second, the authors focused on

fast-food chains, which are not the same as the fast-food industry, which is comprised of both

chains and an independent sector. The independent sector has been observed to be “much more

labour intensive than the chain sector.”18

This being the case, it is entirely possible for the chain

sector of the fast-food industry to experience negligible effects due to a minimum wage increase,

16

Card, David and Alan B. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry

in New Jersey and Pennsylvania,” The American Economic Review, Vol. 84, No. 4, Sept. 1994, pp. 772-793. 17

Card, David and Alan B. Krueger, “Minimum Wage and Employment: A Case Study of the Fast-Food Industry in

New Jersey and Pennsylvania: Reply,” The American Economic Review, Vol. 90, No. 5, Dec. 2000, pp. 1397-1420. 18

Worstall, Tim, “Alan Krueger’s Mistake on the Minimum Wage”, Forbes, Aug. 31, 2011.

16

while the more labor-intensive independent sector (and the industry as a whole) experiences

material negative employment effects due to the minimum wage increase. Third, by focusing on

the fast-food industry, Card and Kruger leave out a significant subpopulation of the minimum

wage workforce (employed outside of the fast-food industry). Fourth, the New Jersey minimum

wage became effective two years after the legislation was passed. It is possible, and perhaps

even likely, that some of the reaction among employer firms to the legislation occurred before

the new minimum wage came into effect. To the extent that the examined time period excluded

some employer’s reactions to the minimum wage increase, the change in employment measured

by Card and Kruger may be biased upward. Fifth, Card and Kruger focused on nationally-

known fast-food enterprises rather than a representative sample of all eating establishments.

Such a focus could bias results upward, as national chain restaurants may be better able to absorb

wage increases than eating establishments in general. If such is the case, national chain

restaurants may even gain market share and expand even as the industry as a whole loses

employment.

The second study of some popularity which presents counterfactual evidence on the

employment effects of minimum wage policy is much more recent. An article by Allegretto,

Dube, and Reich (hereby ADR) published in 2011 asserts that minimum wage increases between

1990 and 2009 had essentially zero impact on teen employment (the authors rule out “any but

very small disemployment effects”).19

Their results were obtained using a methodology that

accounted for the (according to the authors) prior-to-then ignored “heterogeneous employment

patterns that are correlated with selectivity among states with minimum wages.” By including

control variables for “long-term growth differences among states and for heterogeneous

economic shocks,” the authors achieve elasticities for employment and hours worked

“indistinguishable from zero.”

While the approach used by ADR holds some intuitive appeal, a thorough examination of

the authors’ methodology by Neumark, Salas, and Wascher (hereby NSW) “points to serious

problems with [their] research designs.”20

NSW’s analysis provides evidence that the tendency

for including state-specific time trends into the baseline fixed-effects regression model typically

used for minimum wage analysis to eliminate negative employment effects of minimum wages

(during the time period studied) is due principally to the strong influence of the recessionary

periods of the early 1990s or the Great Recession period. NSW show that when long-term trends

are estimated in ways that are not highly sensitive to the business cycle, the estimated effects of

minimum wages on teen employment are negative and statistically significant. NSW also

address the second methodological technique used by ADR to obtain their counterfactual results,

namely, the inclusion of a (Census Division x Period Interaction) term into the regression model.

A justification for the inclusion of this term is that omitted factors could drive patterns of teen

19

Allegretto, Sylvia A., Arindrajit Dube, and Michael Reich, “Do Minimum Wages Really Reduce Teen

Employment? Accounting for Heterogeneity and Selectivity in State Panel Data,” Industrial Relations, Vol. 50, No.

2, Apr. 2011, pp. 205-240. 20

Neumark, David, J.M. Ian Salas, and William Wascher, “Revisiting the Minimum Wage-Employment Debate:

Throwing Out the Baby with the Bathwater?”, Discussion Paper No. 7166, IZA, January 2013.

17

employment differentially by Census division, and therefore this term should be included to

capture those effects. Underlying this approach is the assumption that states within a Census

division make better controls for states where minimum wages increase than are states in other

Census divisions. NSW investigate this claim by utilizing two ranking algorithms to assess

whether within-Census-division states truly do make for better controls.21

The two algorithms

include a synthetic control approach and a “ranked prediction error” approach. Both algorithms

provide evidence which generally question the rationale for restricting control states to those in

the same Census division. In light of these results, NSW conclude that “the evidence still shows

that minimum wages pose a tradeoff of higher wages for some against job losses for others.”

21

The structures of the algorithms are non-trivial and details surrounding them are omitted from this report. Readers

interested in learning more about the algorithms should refer to Neumark et al. noted in footnote 19.