$15 minimum wage: Bad news from Seattle should give Minneapolis pause
As price of labor went up, people bought less of it — as standard economic theory predicts.
This op-ed appeared June 29, 2017 in the Star Tribune.
The Minneapolis City Council’s ordinance raising the minimum wage to $15 goes up for a vote on Friday. During a long and often emotional debate, supporters of the ordinance have often pointed to the example of Seattle, where the minimum wage was raised from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016.
But a new study suggests that Seattle’s experience might be a warning rather than an example.
Economists at the University of Washington have just produced “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle.” This paper (http://bit.ly/2s8Co31) makes use of a new, comprehensive data set from Washington’s Employment Security Department to investigate the effects on Seattle’s labor market of raising the minimum wage.
The authors find that “the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.” That’s $1,500 per annum.
In other words, the price of labor went up and people bought less of it. Labor demand curves slope downward.
This is what standard economic theory would predict. Sometimes, however, it can be a little difficult to see it clearly in the empirical literature. As proxies for low-paid workers, many previous studies look at the effects of the wage increase on workers in a certain sector, such as restaurants or retail, or a particular age group, such as teenagers. This, the Washington economists argue, is unsatisfactory, as it includes some workers earning above the minimum wage in the “treatment” group. The Washington economists, by contrast, look directly at the effects on low-wage workers.
Even with these methodological debates, the weight of empirical literature supports the Washington economists. In 2008, economists David Neumark and William L. Wascher surveyed two decades of research into the effects of minimum-wage laws. They found that “minimum wages reduce employment opportunities for less-skilled workers … [that] a higher minimum wage tends to reduce rather than to increase the earnings of the lowest-skilled individuals … [that] minimum wages do not, on net, reduce poverty … [and that] minimum wages appear to have adverse longer-run effects on wages and earnings.”
Seattle is shaping up to be another such data point. “The goal of this policy was to deliver higher incomes to people who were struggling to make ends meet in the city,” said Jacob Vigdor, one of the study’s authors. “You’ve got to watch out because at some point you run the risk of harming the people you set out to help.”
In 2014, Arindrajit Dube, an economist at the University of Massachusetts, Amherst, and supporter of higher minimum wages, wrote: “Seattle will provide us with an occasion to learn from this experiment and offer opportunities for course corrections. So we need to be open to evidence on what we see on the ground: if Cylons increasingly occupy check-out counters at the Space Needle while humans ring up the Big Macs in Tacoma and Portland, voters in the Emerald City would be well advised to recalibrate their wage standard.”
The evidence emerging from Seattle suggests they would be. Minneapolis should take note.
John Phelan is an economist with the Center of the American Experiment in Golden Valley.