Realist, not conformist analysis of the latest financial, business and political news

As We’ve Been Saying, Seattle’s Minimum Wage Rise Reduced Incomes

Or perhaps as I’ve been saying over multiple sites and multiple years. Seattle decided to aggressively increase the minimum wage to $15 an hour in steps. The prediction from both myself and standard economics was that this would be detrimental to those very low wage workers it was intended to help. Note what the prediction was not – that Seattle’s economy would immediately crater into a wasteland. Similarly, it was indeed insisted that the effects of the wider economy would overwhelm the effects of a minimum wage rise. Looking purely at the unemployment rate itself wasn’t going to tell us much about this specific policy. For the national unemployment rate declining from – just as an example – 7% to 4% is going to have a greater effect that a minimum wage rise to $15.

What we want to know is what is the effect of the minimum wage rise itself, itself and alone. We had one study from the University of Washington – usefully, hired by the Seattle City Council to study the policy – which said, in essence, that hourly wages had risen, hours worked fallen by more, leading to falls in weekly income. Yes, raising the minimum wage reduced incomes.

This is as our general rule of thumb would have it. Minimum wage levels set at 45 to 50% of median wage or below have little effect upon anything. For very few get 45% of median wage or less. Few people will gain higher wages, few people will hire less labour, we’ll probably not even be able to measure the effects of something so trivial in something as complex as an economy. Above 50% we expect to start seeing things. Given a US median hourly wage of perhaps $18 an hour (this is both part and full time, full year and temporary) we’d expect a minimum wage about some $9 an hour to be something with negative effects that we can tease out if we really go looking.

So, that finding from UW. That was followed by:

At which point we have the University of Washington study into the Seattle minimum wage hike. This says that hourly wages have risen and hours worked fallen. This isn’t a surprise at all. But the hours have fallen more, meaning that weekly incomes have actually fallen among those very low-paid people that minimum wage hikes are supposedly helping. A more recent study from Berkeley tries to refute this but also agrees that it doesn’t have and therefore hasn’t looked at detailed data on hours worked. So, obviously enough, the Berkeley study is missing the claimed effect entirely.

And now today we’ve got the initial reports of an update to that UW work:

The researchers estimate that low wages went up more in Seattle than in the counties that didn’t increase wages, meaning they could attribute the gains to the minimum wage, and not broader economic conditions. But they also noticed a drop in hours worked. Some workers still came out ahead, working fewer hours but at higher hourly wage to make up for it. Those tended to be more experienced workers with more time on the job. Less experienced workers were more likely to end up with lower earnings over all, or with no gains.

That’s pretty much the story from the earlier work. But we’ve now an addition:

The economists also looked at rates of entry, or how many people, who did not work before and have no skills, entered the labor market following the wage increase. The estimate that right after the minimum wage went up, entry rates flattened and eventually fell as the minimum wage went up further, suggesting less experienced workers were offered fewer opportunities for work. Meanwhile, in neighboring counties, entry rates continued to increase before leveling off in 2017. This leads them to conclude, “Seattle’s minimum wage ordinance appears to have delivered higher pay to experienced workers at the cost of reduced opportunity for the inexperienced.”

The economists caution the results can’t be generalized because Seattle also experienced a big economic boom in the last five years. A fast-growing economy can better absorb wage increases. But even during a boom time, it seems the policy involves trade-offs. It helps workers stuck in low-wage jobs, while harming workers looking to get their first foothold in the economy.

Or, as Cassandras like myself were saying when the policy was first announced. This is going to reduce the number of jobs on offer. Simply because we humans do buy less of more expensive things. Make labour more expensive and people will hire less of it. I have been saying all of this for some time now.

Do also note how favourable to such wage rises Seattle has been. The world’s most valuable company, the one that’s just produced the world’s richest man, is based in the city and has been growing like gangbusters this past few years. Even with that economy background, against a more general recovery in the US employment market, with the national unemployment level hovering around full employment, even then, yes, even then the effect of a “too high” minimum wage is a loss of income for at least some low end workers. And if mandated wage rises aren’t going to work against that background then they never are, are they?

To repeat that, the US is at the top of the business cycle, unemployment is at generational lows. Seattle is booming on top of that because of Amazon. And yet a $15 an hour minimum wage is causing income losses for those at the bottom end. It’s not a policy that works, is it?

0 0 votes
Article Rating
Notify of

Newest Most Voted
Inline Feedbacks
View all comments
5 years ago

Just watch. Mandating hourly pay hasn’t worked, so next they’ll demand to mandate weekly pay. And when you get employed three weeks out of four they’ll demand to mandate monthly pay. And when you get laid off for Christmas and Summer, they’ll demand to mandate yearly pay. I think at that point employers will just lay you off completely.

5 years ago

The left has great faith in their ability to skillfully manage society so that everyone is established at some acceptable standard of living and then kept there. So, if you were to announce a study that a rise in the minimum wage helped half of minimum wage earners and hurt the other half they would consider it a resounding victory. After all, they’ve now sorted the situation of half these workers and just have the other half to go.

5 years ago
Reply to  TD

It’s the haves versus the have-nots. Labour movements including unions should stick to addressing injustices on the job and stay the heck out of the compensation arena.

Would love your thoughts, please comment.x