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This column appeared November 7th, 2018 at the Foundation for Economic Education.
Economic theory has a few things to say about what will happen to the quantity demanded of something if you raise its price. But activists—and a few economists—have argued that, for various reasons, when the quantity you’re talking about is the quantity of labor, it isn’t as simple as that. In this context, the experience of Seattle has assumed vital importance.
In 2014, the City Council there passed an ordinance that raised the minimum wage in stages from $9.47 to $15.45 for large employers this year and $16 in 2019. Last year, research commissioned by the Seattle City Council itself was released. It examined the effects of the increases from $9.47 to as much as $11 in 2015 and to as much as $13 in 2016. This study, conducted by economists from the University of Washington, found:
…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. [This was later revised to $74]
In other words, the price of labor went up and the quantity of labor demanded fell. It turns out that labor demand curves do slope downwards after all.
Research continues into the Seattle experience. University of Washington economists have now released a follow-up paper which some are touting as vindication for the “Fight for $15.” CNN tweeted: “New evidence shows that Seattle’s fast-rising minimum wage has boosted incomes for low-wage workers, with little negative effect on overall employment.”
Not so fast, CNN. When you actually dig into the results, a rather different picture emerges.
This new study is not an “update” of the previous work, as CNN claims. The 2017 paper looked at Seattle’s aggregate low-wage payroll; this new one looks at workers already employed when the minimum wage rose. It splits them into two categories— experienced and inexperienced workers—and examines the effect on each. It finds that, on average, experienced workers earned $84 a month more. Inexperienced workers, on the other hand, got no real earnings boost—they just worked fewer hours.
When we look more closely at the results for experienced workers, however, we find that about a quarter of their increase in pay came from taking additional work outside Seattle to make up for lost hours. And, quite plainly, the findings for inexperienced workers show that when the price of their labor went up, the quantity of it demanded fell, exactly as economic theory predicts. Instead of more money, which is supposed to be the whole point of the “Fight for $15,” they got more free time.
And then there are the workers who, as a result of this ordinance, don’t get to enter the labor force in the first place. The study finds a notable decline of about 5 percent in the number of people entering Seattle’s low-wage workforce in each quarter. As the study’s Figure 5 shows, Seattle used to track the rest of Washington State quite closely on this measure but has slipped below it since the minimum wage hikes began. If Seattle had continued to match the rest of the state, there would have been an additional 500 workers joining the low-wage labor force each quarter.
Simply put, this study finds that the minimum wage ordinance boosted wages a bit for more skilled workers, did nothing for less skilled workers, and actively blocked those with minimal or no skills from the labor market. As the study authors note, “Seattle’s minimum wage ordinance appears to have delivered higher pay to experienced workers at the cost of reduced opportunity for the inexperienced.”
This is in line with what the balance of empirical research suggests. In 2008, economists David Neumark and William L. Wascher surveyed two decades of research into the effects of minimum wage laws. They found:
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.
In 2014, along with economist J.M. Ian Salas, they examined the subsequent literature and concluded:
that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.
Again, this is what economic theory predicts. After all, a minimum wage law simply makes it illegal to hire anyone whose skills do not enable them to generate at least the minimum wage in revenues. The real Iron Law of Wagesis that no hire will take place at a wage level above the employer’s estimate of what the employee will add to revenue. If it did, the employer would be adding more to costs (wages) than to revenues, and they wouldn’t be employing anybody for very long.
Despite this economic reality, activists across the United States are pushing for legally mandated minimum wages of $15 an hour. The federal minimum wage hasn’t increased since 2009, but state and local governments have acted instead. Ten large cities and seven states have passed minimum wages of between $12 and $15.
This is a pretty hefty hike in most cases. In Saint Paul, Minnesota, whose city council seems intent on bringing this measure in, it would represent an increase of 52 percent for large businesses and 87 percent for small businesses.
Kshama Sawant, a member of Seattle City Council and leading campaigner for a $15 minimum wage, recently wrote that Saint Paul’s workers were “on the home stretch of a fantastic campaign to put the needs of working people above the profit margins of big business.”
This new research from the University of Washington is yet another piece of evidence revealing this for the deluded claptrap it is. When a politician decrees a higher minimum wage, they are not waving some magic wand that will conjure up a free lunch for low-paid workers. They are, at best, making more-skilled workers better off at the expense of less-skilled workers. It is they who bear the cost, not some mythical robber barons.