Seattle’s minimum wage fiasco is not only a failure for low-wage earners but in understanding basic economics.
In 2014, Seattle voted to incrementally increase the minimum wage from $9.47 to $15. By incrementally, they meant two major increases in two years, followed by inflation adjustments until it reaches $15. The first hike happened in 2015, where the wage went from $9.47 to $11. In 2016, the second increase from $11 to $13 was implemented, making Seattle the city with the highest minimum wage in the country.
A study by economists at the University of Washington preyed on this “natural experiment” to analyze how these hikes would impact worker earnings, employment and the surrounding economy.
Long story short: the results are not as bright as policymakers expected.
What the report says
The first increase to $11 per hour didn’t seem to shake things up too much. But after waiting a couple years for Seattle’s economy to adjust to the changes while adding the second hike up to $13 per hour, the negative impact on low-wage workers becomes pretty evident.
- The number of hours worked by low-wage workers dropped — by 3.5 million hours per quarter.
- On average, low-wage workers lost $125 per month.
- Seattle businesses reduced income paid to low-wage workers by a total of $120 million per year. Another economist illustrates this finding nicely by saying “minimum wage has always been a lousy income-transfer program, but at this level, you’d come out ahead just setting $100 million a year on fire.”
The novelty of this study is that it looks at the employment effects of low-wage workers in all categories and all industries. Previous minimum wage studies typically focused on restaurant jobs or on “lower productivity employees such as teenagers.”
The other studies that came out in defense of Seattle’s wage hike show that it did not have much of an effect on employment in the restaurant industry. The University of Washington study finds the same results when they applied the same data limitations. It isn’t telling the whole story, though.
Fight for $15
These wage hikes, along with the hikes proposed in several other cities, are a result of the low-wage worker backlash almost five years ago. If we recall, the Fight for $15 began in 2012 when 200 New York fast-food workers walked off their jobs in protest, demanding $15 an hour and union rights.
Many folks point out that a minimum wage earner in the ’60s could buy more stuff in “real terms” than a minimum-wage earner can today. They had more “purchasing power.” Also, the discussion about how much money is going to the top 1 percent has added extra oomph to the fight.
The economics of the minimum wage
Standard economics tells us that if you raise the price of something, fewer people will want to buy that something. In the case of minimum wages, if the wage is increased, fewer employers are going to hire workers.
However, it’s not so clean cut in the real world. The minimum wage has been hotly debated for years, with studies showing that there are no effects on employment. Some studies have even found that increasing the wage resulted in more workers being hired.
Many of these pro-minimum wage studies, though, have only seen the effects of modest increases in the wage. These modest increases are often absorbed by the employers or are counteracted by other factors such as an already booming economy or the type of industry in the area. Additionally, the extra couple bucks at the end of the week from these small increases don’t really make a dent in the whole poverty problem.
Importantly, minimum-wage increases will have different effects in different areas. Conceivably in New York, where the cost of living is much higher than most parts of the country, a modest minimum-wage hike wouldn’t result in an economic apocalypse. But applying that same wage hike in Florida very well might bring on that apocalypse.
This new study, though by no means the knockout punch that kills the minimum wage debate, brings to light that when the wage is increased to the point where it can seemingly make a noticeable improvement in the paychecks of low-wage workers, employers react much more drastically. Hours are cut. Employers change their hiring practices. Workers lose money.
Although the fight for $15 is certainly a noble fight, it can have some painful consequences, especially to those they are trying to help. Perhaps using the minimum wage as a weapon to combat poverty should be laid to rest, but it probably won’t.