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Saturday, July 30, 2016

Seattle’s Minimum Wage Hike Didn’t Help Low-wage Workers

The minimum wage is making some better off by making others worse off.

In late 2014, the city of Seattle did something some economists would describe as daring when it passed a law requiring the minimum wage to be raised to $15 an hour, in stages, by 2017. Risky or not, the law has excited economic and political analysts by creating a unique experiment that researchers can exploit to better understand how large increases in the minimum wage affect a large city. (For more on the minimum wage, see “3 Reasons the $15 Minimum Wage Is a Bad Way to Help the Poor.”)

Seattle’s minimum wage law went into effect in April of 2015, which resulted in the minimum wage first being raised to $11 per hour from $9.32. Since then, Seattle’s economy has performed strongly, with stronger than average growth in wages and employment. This has led some on the political left to cite Seattle as proof that raising the minimum wage doesn’t result in job losses or hours cuts for workers, or negatively affect the local economy as a whole, as textbook economic theory predicts.

However, as Adam Ozimek of Moody’s Analytics noted, “Simply showing that Seattle added jobs after the minimum wage hike does not disprove job losses.” In order to understand the true effect of the minimum wage increase, it is important to estimate how Seattle’s labor market and low-wage workers would have fared if the $11 minimum wage had never been enacted in the first place.

Fortunately, a team of researchers from the University of Washington were tasked with doing just that, and have recently released their initial findings on the short-run effects of Seattle’s minimum wage increase. To do this, the researchers used statistical models based on historic trends in Seattle’s labor market to predict what would have happened to it had the minimum wage never been raised.

They also compared Seattle to nearby regions in Washington, which had similar levels and trends in the economic outcomes being studied, but did not raise their minimum wages. Using both these methods, the authors were able to estimate the short-run impact of raising Seattle’s minimum wage.

Their results aren’t as rosy as some minimum wage proponents might have hoped, and they largely paint a picture of the minimum wage as an ineffective tool at increasing the earnings of workers. They found that the minimum wage had increased wages, as expected, but also that their “best estimates find that the Seattle Minimum Wage Ordinance appears to have lowered employment rates of low-wage workers.”

When the costs and benefits of the minimum wage were taken into account, the authors wrote that “the effects of disemployment appear to be roughly offsetting the gain in hourly wage rates, leaving the earnings for the average low-wage worker unchanged,” and that “Seattle’s low wage workers would have experienced almost equally positive trends if the minimum wage had not increased.”

Their final verdict was that: “The major conclusion one should draw from this analysis is that the Seattle Minimum Wage Ordinance worked as intended by raising the hourly wage rate of low-wage workers, yet the unintended, negative side effects on hours and employment muted the impact on labor earnings.”

That’s a very disappointing result for those who were under the impression that the minimum wage could actually be used as an effective tool to increase the earning of low-income working people, especially the #Fightfor15 crowd.

That’s not the only bad news regarding Seattle’s minimum wage. The authors additionally note that the “negative unintended consequences…[are] concerning and need to be followed closely in future years because the long-run effects are likely to be greater as businesses and workers have more time to adapt to the ordinance.”

Indeed, research published in 2015 by economists Jonathon Meer of Texas A&M University and Jeremy West of MIT found that the long-run disemployment effects of minimum wage increases were considerably larger than the much smaller short-run effects. In all likelihood, Seattle has not fully experienced the negative consequences resulting from its decision to raise the minimum wage.

The University of Washington study authors caution that these findings are not generalizable to other cities or regions, because “Seattle’s strong economy may make it capable of absorbing higher wages for low-wage workers, and this capacity may not be present in other regions.” Thus, it’s quite likely that other cities following Seattle’s lead would experience even worse outcomes than Seattle’s less-than-stellar results.

In sum, Seattle does not prove the efficacy of raising the minimum wage as a way of helping low-income working people increase their incomes. And unlike many cities, Seattle was well situated, economically, to handle a large minimum wage increase, and the consequences were still mediocre, leaving the average low-wage worker virtually no better off.

It is unlikely that other cities would fare better, and they would likely fare worse. If the Seattle experience thus far shows us anything, it is that government mandated minimum wages aren’t serious solutions to the problem of poverty.

  • Corey Iacono is a Master of Business graduate student at the University of Rhode Island with a bachelor's degree in Pharmaceutical Science and a minor in Economics.