Michael J. Chow
NFIB Research Center
Washington, DC
May 12, 2017

Economic Impact Analysis of HB 198 on Illinois Small
Businesses and Their Employees
This report analyzes the potential economic impact of implementing a proposal currently
under discussion to increase the minimum wage to $15.00 per hour in Illinois. Currently,
legislators in Illinois are considering a plan that would increase the minimum wage from $8.25 an
hour to $9.00 per hour on January 1, 2018, $10.00 per hour on January 1, 2019, $11.25 per hour
on January 1, 2020, $13.00 per hour on January 1, 2021, and, finally, $15.00 per hour on January
1, 2022. Such increases in the minimum wage would also have the effect of increasing the
mandatory cash wage (set equal to at least 60 percent of the effective state minimum wage by
Illinois law) paid by employers to tipped employees.
Using the Business Size Insight Module (BSIM), 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 was estimated that over a ten-year period beginning in 2018, the
proposed wage schedule would reduce Illinois private sector employment by over 93,000 jobs and
result in a cumulative reduction in Illinois real output of over $56 billion over the ten-year forecast
window. Nearly 56 percent of the forecast job losses are jobs that would have been in the small
business sector of the economy.
1

 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 Illinois is currently $8.25 per hour (Table 1), $1.00 per
hour higher than federal rate.
Table 1: Historical Effective Minimum Wage Rates for Non-farm Employment in Illinois
Year
Minimum Wage
Year
Minimum Wage
1976
$2.30 (per hour)
1997
$4.75
1977
$2.30
1998
$5.15
1978
$2.65
1999
$5.15
1979
$2.90
2000
$5.15
1980
$3.10
2001
$5.15
1981
$3.35
2002
$5.15
1982
$3.35
2003
$5.15
1983
$3.35
2004
$5.50
1984
$3.35
2005
$6.50
1985
$3.35
2006
$6.50
1986
$3.35
2007
$6.50
1987
$3.35
2008
$7.50
1988
$3.35
2009
$7.75
1989
$3.35
2010
$8.00
1990
$3.35
2011
$8.25
1991
$3.80
2012
$8.25
1992
$4.25
2013
$8.25
1993
$4.25
2014
$8.25
1994
$4.25
2015
$8.25
1995
$4.25
2016
$8.25
1996
$4.25
2017
$8.25
Source: Department of Labor
Despite an increase of 27 percent in the effective minimum wage in Illinois since 2007,
proponents of a higher minimum wage continue to push for additional increases. A proposal
currently under consideration by state legislators would increase the minimum wage from $8.25
an hour to $9.00 an hour immediately, followed by increasingly large annual raises until the
minimum wage reaches $15.00 per hour in 2022. This represents a near doubling of the minimum
wage in just a handful of years.

2

 This brief report quantifies the potential economic impacts implementation of the proposed
minimum wage increase might have on Illinois small businesses and their employees by using the
Business Size Insight Module. 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. The underlying mechanics of the REMI model are based on decades of peerreviewed literature.1 The model is used by numerous clients in both the private and public sectors.2
The BSIM is a customized version of the REMI model that 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 would impact employer firms and their
employees.

Description of New Employer Costs Under the Proposed Minimum Wage
Increase in Illinois
Minimum wage increases raise the cost of labor for employers.3 The proposed increase in the
Illinois minimum wage directly raises the cost of labor by mandating increases to the state
minimum wage from $8.25 this year to $9.00 in 2018 and, ultimately, to $15.00 by 2022 through
increasingly large annual raises. Raising the minimum wage to $15.00 per hour from its current
level is equivalent to raising the cost of labor for employers of minimum wage workers by 82
percent. This increase to the cost of labor is not inconsequential. According to the Bureau of
Labor Statistics, there are 19,000 workers in Illinois who currently earn the minimum wage and
would be directly and immediately affected by an increase in the state minimum wage.4

1

A list of the peer-reviewed literature is available at http://www.remi.com/download/model-equations-v20?wpdmdl=7783. The list of references includes articles published in the American Economic Review and The
Review of Economics and Statistics.
2
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 list of clients that use the REMI model is
available at http://www.remi.com/clients. The list has included consultancies like Boston Consulting Group and
Ernst and Young, educational institutions like the Massachusetts Institute of Technology, nonprofit institutions like
AARP and the Urban Institute, and federal, regional, and local government agencies.
3
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.
4
“Characteristics of Minimum Wage Workers: 2015,” Table 3, Bureau of Labor Statistics,
http://www.bls.gov/opub/reports/minimum-wage/2015/pdf/home.pdf.

3

 Table 2: Illinois Minimum Wage Trajectories Under HB 198
Year

Hypothetical Minimum Wage
Schedule under Current Proposal

2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027

$8.25 (per hour)
$9.00
$10.00
$11.25
$13.00
$15.00
$15.00
$15.00
$15.00
$15.00
$15.00

Hypothetical Percentage Increase in
Illinois Minimum Wage
(Compared to Status Quo)
N/A

9.1%
21.2%
36.4%
57.6%
81.8%
81.8%
81.8%
81.8%
81.8%
81.8%

Moreover, this increase in the Illinois minimum wage would have a substantial impact on
the cash wage that employers must pay to “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.”5 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. The cash wage in Illinois is
currently set to $4.95 per hour, nearly three dollars higher than the federal minimum. According
to the Bureau of Labor Statistics, there are 57,000 Illinois workers who earn below the minimum
wage. Tipped employees are required by law to earn the minimum wage through a sum of cash
wages, tips, food, and lodging. Also by law, the minimum cash wage in Illinois is currently set
equal to 60 percent of the effective state minimum wage. HB 198 maintains this cash wage
minimum, meaning that the bill would increase the minimum cash wage to $5.40 per hour in 2018,
$6.00 per hour in 2019, $6.75 per hour in 2020, $7.80 per hour in 2021, and $9.00 per hour in
2022.
A second issue a modeler must concern himself with when modeling an increase in the
state minimum wage is business size exemptions. Some states exempt businesses of a certain size
from minimum wage requirements. Illinois currently exempts employer firms with three or fewer
employees from minimum wage laws. HB 198 would ignore this exemption and impose a
mandatory minimum wage on even the smallest of employers, leaving no businesses of any sizeof-firm group free from the mandate.
A third issue takes the form of potential “emulation effects” associated with individuals
earning near (just above) the current minimum wage. Some of these individuals will earn between
$8.25 per hour and the higher wages mandated in subsequent years (beginning with $9.00 per hour
5

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.

4

 in 2018). In the absence of employer action, these workers will see their wages raised
automatically to these new levels contingent upon the passage of the bill. However, wages for
these workers may increase to even higher levels if employers attempt to maintain the preimplementation wage structure and raise wages for these workers to levels above the new
minimum wage. Failure to increase the wages of near-minimum-wage earners sufficiently and
allowing wage compression to occur 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 attempt to restore work effort.” 6 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, for this
analysis, it was adjudged that 15 percent 7 of Illinois’s private sector employees less those
individuals earning at or below the minimum wage would also see per capita raises equal to the
dollar amount in wage increases experienced by workers earning at the minimum wage in years
2018 and beyond.8
Besides the direct cost of higher wages in an increased minimum wage scenario, there are
significant additional employer costs in the form of additional payroll taxes 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 help fund
old age, survivors, and disability insurance, and 1.45 percentage points go toward helping to pay
for Medicare hospital insurance. Employers can expect to pay more in payroll taxes as a
consequence of a minimum wage increase.

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 welldeveloped. An increase in the minimum wage therefore should not require the development of
Grossman, Jean Baldwin, “The Impact of the Minimum Wage on Other Wages,” The Journal of Human Resources,
Vol. 18, No. 3 (Summer 1983).
7
According to the Bureau of Labor Statistics, Illinois wage earners at the 10th percentile earn $9.31 per hour, while
those at the 25th percentile earned $11.57 per hour. Emulation effects can be assumed to occur among workers who
earn near (within a few dollars of) the minimum wage. Some workers at the 15th percentile may earn above the
proposed wage level of $9.00 in 2018, but all workers at the 15th percentile earn below the proposed “final” wage
level of $15.00 per hour. These workers would eventually and automatically see their wages increase to the new
minimum wage of $15.00 in a few years if the proposal was passed and implemented, all else unchanged, but a
reasonable scenario is that these workers will press for the restoration of the original wage structure. It is assumed
that emulation effects do not occur for workers earning above the 15 th percentile. For workers earning at or below
the 15th percentile, it is assumed that earnings increase by $0.75 per hour in 2018 if the act is implemented, by an
additional $1.00 per hour in 2019, and so on and so forth.
8
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.
6

5

 new government mechanisms or materially increase government administrative costs. Hence, the
analysis assumes no projected increases in government demand resulting from the implementation
of the proposed minimum wage increase.

Additional Private Spending in the Economy
Consumers in an economy have two choices of what to do with their after-tax income. They can
either choose to spend it, thereby increasing consumption within the economy, or they can elect to
save it, and in doing so potentially increase investment in the economy. Government stimulus
programs frequently focus on transferring wealth to lower-earning individuals because of the
strong likelihood that these individuals will elect to spend the additional wealth, producing a
consumption-fueled boost to the economy, rather than to save. 9 Consistent with expectations
pertaining to increases in income for low-income workers, this analysis assumes that new
additional income received by minimum wage earners is spent (and not saved), leading to an
increase in consumption.
In the analysis, the conversion of higher labor costs for employers into increased
consumption by workers receiving wage increases occurs automatically due to the way in which
wage costs are inputted into the BSIM. Since employer 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, as
mentioned previously, it is believed that during cases involving the transfer of wealth to lowerearning individuals, there is a strong likelihood that these individuals will elect to spend the
additional wealth (rather than save), producing a consumption-fueled boost to the economy.
Concerns that minimum wage increases may provide a countervailing spending “stimulus” effect
to the economy are therefore satisfied automatically in this analysis.10

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
The fact that the BSIM automatically accounts for an increase in consumer spending as a consequence of an
increase in the “Wage Labor Cost” variable is an important point that should not be missed. That increased
consumption is automatically accounted for by the model in an analysis of a minimum wage increase means that
9

6

 Simulation Results
BSIM simulation results for the modeled scenario in which the minimum wage proposal becomes
law are provided below. All employment figures are expressed as number of employees, while
output figures are expressed as billions of 2015 dollars. Under the above assumptions, job losses
forecast in year 2027 exceed 93,000 (Table 3). More precisely, the BSIM forecasts that there will
be more than 93,000 fewer jobs in 2027 due to the house bill’s mandated increase in the cost of
labor than there otherwise would have been (if the bill had not been implemented). More than 55
percent of the forecast jobs lost are jobs that would have been in the small business sector of the
economy. At a sectoral level, food services and drinking places (a sub-industry of the NAICS
“leisure and hospitality” industry category) and retail trade are forecast to experience significant
job losses (Table 4 and Table 5). The BSIM forecasts that in 2027, there will be over 10,800
fewer jobs in food services and drinking places (11.6 percent of all jobs lost).
In addition to forecast reductions in employment, real output11 is also projected to decrease
by approximately $13.2 billion by 2027 (Table 6). Over the ten-year forecast window, the
cumulative real output lost exceeds $56 billion (Table 7). Nearly half (46 percent) of the
cumulative reduction in real output is expected to occur in the small business sector of the economy.

Table 3: Employment Difference from Baseline (Number of Employees) Under HB 198
Firm Size
1-4
Employees
5-9
Employees
10-19
Employees
20-99
Employees
100-499
Employees
500 +
Employees
< 20
Employees
< 100
Employees
< 500
Employees
All Firms

2018

2019

2020

2021

2022

2023

2024

2025

2026

Percent
of Total
(2026)

2027

-59

-249

-619

-1,214

-2,052

-3,076

-4,138

-5,105

-5,901

-6,499

7.0%

-114

-387

-865

-1,605

-2,603

-3,638

-4,666

-5,584

-6,331

-6,884

7.4%

-101

-367

-866

-1,669

-2,783

-3,944

-5,103

-6,141

-6,985

-7,610

8.1%

-248

-896

-2,083

-3,975

-6,577

-9,216

-11,772

-14,027

-15,840

-17,166

18.4%

-242

-859

-1,917

-3,518

-5,656

-7,815

-9,799

-11,504

-12,858

-13,846

14.8%

-673

-2,591

-5,941

-11,019

-17,843

-24,529

-30,288

-35,071

-38,764

-41,385

44.3%

-275

-1,003

-2,350

-4,489

-7,438

-10,659

-13,907

-16,831

-19,217

-20,993

22.5%

-523

-1,899

-4,434

-8,464

-14,014

-19,875

-25,679

-30,859

-35,056

-38,159

40.9%

-765
-1,438

-2,758
-5,348

-6,351
-12,292

-11,982
-23,001

-19,670
-37,513

-27,690
-52,218

-35,478
-65,766

-42,363
-77,434

-47,914
-86,678

-52,005
-93,390

100.0%

exogenous increases in private sector demand are unnecessary for a model to be complete. Including such
exogenous increases makes the resulting forecasts conservative.
11
The term “output” refers to the aggregate output of the Illinois economy (IL 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.

7

55.7%

 Table 4: Employment Difference from Baseline (Number of Employees) Under HB 198, Food Services and Drinking
Places
Firm Size
1-4
Employees
5-9
Employees
10-19
Employees
20-99
Employees
100-499
Employees
500 +
Employees
< 20
Employees
< 100
Employees
< 500
Employees
All Firms

2018

2019

2020

2021

2022

2023

2024

2025

2026

Percent
of Total
(2027)

2027

-21

-54

-99

-164

-241

-279

-309

-334

-353

-367

3.4%

-36

-93

-171

-283

-415

-480

-533

-575

-609

-632

5.8%

-67

-171

-316

-522

-766

-887

-984

-1,062

-1,124

-1,167

10.8%

-179

-460

-849

-1,402

-2,058

-2,383

-2,643

-2,854

-3,020

-3,136

29.0%

-79

-202

-373

-616

-904

-1,046

-1,161

-1,253

-1,326

-1,377

12.7%

-237

-607

-1,121

-1,850

-2,717

-3,146

-3,489

-3,767

-3,987

-4,140

38.3%

-124

-318

-587

-968

-1,421

-1,646

-1,825

-1,971

-2,086

-2,166

20.0%

-303

-778

-1,436

-2,370

-3,479

-4,029

-4,469

-4,825

-5,106

-5,303

49.0%

-382
-619

-980
-1,588

-1,809
-2,930

-2,985
-4,836

-4,383
-7,099

-5,075
-8,221

-5,629
-9,118

-6,078
-9,845

-6,433
-10,420

-6,680
-10,820

61.7%
100.0%

2027

Percent
of Total
(2027)

Table 5: Employment Difference from Baseline (Number of Employees) Under HB 198, Retail Trade
Firm Size
1-4
Employees
5-9
Employees
10-19
Employees
20-99
Employees
100-499
Employees
500 +
Employees
< 20
Employees
< 100
Employees
< 500
Employees
All Firms

2018

2019

2020

2021

2022

2023

2024

2025

2026

6

1

-17

-49

-103

-180

-251

-313

-364

-404

4.4%

7

2

-20

-60

-126

-220

-307

-383

-445

-494

5.4%

7

2

-21

-63

-130

-228

-317

-396

-461

-511

5.6%

15

3

-46

-135

-281

-493

-685

-856

-995

-1,104

12.1%

10

2

-29

-85

-176

-309

-430

-537

-625

-693

7.6%

82

19

-246

-727

-1,512

-2,649

-3,685

-4,603

-5,353

-5,936

64.9%

20

4

-58

-172

-359

-629

-875

-1,093

-1,271

-1,409

15.4%

35

8

-104

-308

-640

-1,121

-1,560

-1,948

-2,266

-2,513

27.5%

44
127

10
29

-133
-379

-392
-1,119

-816
-2,328

-1,431
-4,080

-1,990
-5,675

-2,485
-7,089

-2,890
-8,244

-3,205
-9,141

35.1%
100.0%

8

 Table 6: Real Output Difference from Baseline (Billions of 2015 Dollars) Under HB 198
Firm Size
1-4
Employees
5-9
Employees
10-19
Employees
20-99
Employees
100-499
Employees
500 +
Employees
< 20
Employees
< 100
Employees
< 500
Employees
All Firms

Percent
of Total
(2027)

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

$0.019

$0.034

$0.035

$0.018

-$0.030

-$0.153

-$0.295

-$0.434

-$0.551

-$0.643

4.9%

$0.011

$0.014

$0.000

-$0.036

-$0.104

-$0.226

-$0.361

-$0.489

-$0.596

-$0.680

5.2%

$0.011

$0.012

-$0.010

-$0.060

-$0.150

-$0.299

-$0.460

-$0.612

-$0.739

-$0.838

6.4%

$0.012

-$0.015

-$0.108

-$0.283

-$0.565

-$0.965

-$1.371

-$1.741

-$2.045

-$2.279

17.3%

-$0.002

-$0.051

-$0.164

-$0.355

-$0.645

-$1.013

-$1.366

-$1.676

-$1.926

-$2.116

16.1%

-$0.021

-$0.214

-$0.625

-$1.294

-$2.278

-$3.446

-$4.494

-$5.388

-$6.094

-$6.622

50.3%

$0.041

$0.060

$0.025

-$0.078

-$0.284

-$0.678

-$1.116

-$1.535

-$1.886

-$2.161

16.4%

$0.053

$0.045

-$0.083

-$0.361

-$0.849

-$1.643

-$2.487

-$3.276

-$3.931

-$4.440

33.7%

$0.051
$0.030

-$0.006
-$0.220

-$0.247
-$0.872

-$0.716
-$2.010

-$1.494
-$3.772

-$2.656
-$6.102

-$3.853
-$8.347

-$4.952
-$10.340

-$5.857
-$11.951

-$6.556
-$13.178

49.7%
100.0%

Percent
of Total
(2027)

Table 7: Cumulative Real Output Difference from Baseline (Billions of 2015 Dollars) Under HB 198
Firm Size
1-4
Employees
5-9
Employees
10-19
Employees
20-99
Employees
100-499
Employees
500 +
Employees
< 20
Employees
< 100
Employees
< 500
Employees
All Firms

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

$0.019

$0.053

$0.088

$0.106

$0.076

-$0.077

-$0.372

-$0.806

-$1.357

-$2.000

3.5%

$0.011

$0.025

$0.025

-$0.011

-$0.115

-$0.341

-$0.702

-$1.191

-$1.787

-$2.467

4.3%

$0.011

$0.023

$0.013

-$0.047

-$0.197

-$0.496

-$0.956

-$1.568

-$2.307

-$3.145

5.5%

$0.012

-$0.003

-$0.111

-$0.394

-$0.959

-$1.924

-$3.295

-$5.036

-$7.081

-$9.360

16.5%

-$0.002

-$0.053

-$0.217

-$0.572

-$1.217

-$2.230

-$3.596

-$5.272

-$7.198

-$9.314

16.4%

-$0.021

-$0.235

-$0.860

-$2.154

-$4.432

-$7.878

-$12.372

-$17.760

-$23.854

-$30.476

53.7%

$0.041

$0.101

$0.126

$0.048

-$0.236

-$0.914

-$2.030

-$3.565

-$5.451

-$7.612

13.4%

$0.053

$0.098

$0.015

-$0.346

-$1.195

-$2.838

-$5.325

-$8.601

-$12.532

-$16.972

29.9%

$0.051
$0.030

$0.045
-$0.190

-$0.202
-$1.062

-$0.918
-$3.072

-$2.412
-$6.844

-$5.068
-$12.946

-$8.921
-$21.293

-$13.873
-$31.633

-$19.730
-$43.584

-$26.286
-$56.762

46.3%
100.0%

9

 Illinois Jobs Lost (Employment Difference from Baseline) by 2027,
by Employee-Size-of-Firm
Jobs Lost (Employment Difference from Baseline)

0
2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

-10,000

-20,000
-30,000
-40,000
-50,000
-60,000
-70,000
-80,000
-90,000
-100,000

Employee-Size-of-Firm Category
All Firms

Small Business

Figure 1
10

 $0

Cumulative Real output Lost from 2018 to 2027
(Billions of 2015 $s)

1-4
5-9
10-19
20-99
100-499
500 +
<20
<100
<500
All Firms
Employees Employees Employees Employees Employees Employees Employees Employees Employees
-2.5B
-3.1B
-2.0B

-$10

-7.6B
-9.4B

-9.3B

-17.0B

-$20

-26.3B

-$30
-30.5B

-$40

-$50

-56.8B

-$60
Figure 2

11

 Percent Share of Jobs Lost or Cumulative Real Output Lost

100%
90%

Percent Shares of Jobs Lost and Cumulative Real Output Lost
Attributable to Different Employee-Size-of-Firm Categories
Percent Share of 2027 Jobs Lost
Percent Share of Cumulative Real GDP Lost (2018-2027)

80%
70%
60%
50%
40%
30%
20%
10%
0%
1-4
5-9
10-19
20-99
100-499
500 +
<20
<100
<500
Employees Employees Employees Employees Employees Employees Employees Employees Employees

All Firms

Employee-Size-of-Firm Category

Figure 3
12

 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.12 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.”13
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 fastfood 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.”14 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, while
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.
13
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.
14
Worstall, Tim, “Alan Krueger’s Mistake on the Minimum Wage”, Forbes, Aug. 31, 2011.
12

13

 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 fastfood 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”).15 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.”16 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
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
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.
16
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.
15

14

 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.17 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.”

17

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 16.

15