Raising the Minimum Wage Can Backfire

Republican commentator Ben Shapiro summarized an interesting article in the Washington Post: “A ‘very credible’ new study on Seattle’s $15 minimum wage has bad news for liberals“. This adds some more evidence to the question I’ve asked previously: Is Raising the Minimum Wage a Good Idea? The article is fairly long. Let me summarize, hopefully removing the “expert” opinions and leaving the facts:

Seattle has been gradually increasing the hourly minimum to $15 over several years. According a study commissioned by the city and conducted by economists at the University of Washington, some employers, unable to afford the increased minimums, have cut their payrolls, put off new hir3-dollarsing, reduced hours or let their workers go. For every dollar gained with the higher wages, low-wage workers lost three. The average low-wage worker in the city lost about $125 a month.

Many past studies have found that the benefits of increases for low-wage workers exceed the costs in terms of reduced employment — often by a factor of four or five to one. This paper, however, uses more detailed data than have previously been available, drawing on state records of wages and hours for individual employees. “[This is] a step beyond what … any past studies of the minimum wage have been able to use,” said Jeffrey Clemens, an economist at the University of California, San Diego who was not involved in the research.

In 1994, economists David Card and Alan Krueger published research on minimum wages in Pennsylvania and New Jersey, based on a survey of fast-food restaurants in the two states taken while New Jersey was implementing an increase in the minimum wage. They found that restaurants in New Jersey added more workers to their payrolls than restaurants in neighboring Pennsylvania, where the minimum wage remained constant.

When the authors of the Seattle study took the same approach, measuring overall employment in the restaurant industry, they got similar results. The minimum wage did not substantially affect how many people were working in the industry or how many hours they were working. But while employment overall did not change, employers replaced low-paying jobs with high-paying jobs. The number of workers making over $19 an hour increased sharply, while the number making less than that amount declined.

The authors posit that restaurateurs in Seattle — along with other employers — responded to the minimum wage by hiring more skilled and experienced workers, able to produce more revenue for their firms in the same amount of time. “Basically, what we’re doing is we’re removing the bottom rung of the ladder,” said Jacob Vigdor, an economist at the University of Washington and one of the authors.

Another explanation for the results, however, is the fact that to avoid confusing establishments that were subject to the minimum with those that were not, the authors did not include large employers with locations both inside and outside of Seattle in their calculations. It could be that as employers with only a single location cut payrolls, large firms expanded at the same time, giving low-wage workers other opportunities to earn money. Other researchers have found that large employers are better able to raise wages in response to changes in the minimum.

“I think they underestimate hugely the wage gains, and they overestimate hugely the employment loss,” said Michael Reich, an economist at the University of California, Berkeley who published its own study of the minimum wage in Seattle. His group’s data did not allow the researchers to distinguish between high and low wage workers at a given firm, but they were able to separate large firms’ locations in Seattle from those outside the city. Their results accorded with past research: the minimum wage increased wages without reducing employment overall, in contrast to the findings from the University of Washington.

Seattle’s economy is booming, and in a booming economy, more workers get raises or find jobs that pay better. Vigdor and his colleagues sought to address this problem by constructing a control group based on data from other parts of the state with economies similar to Seattle’s before the increases in the hourly minimum. Low-wage employment declined in Seattle relative to this benchmark, supporting the theory that increasing the minimum wage forced employers to cut some of those positions.

Experts cautioned that the effects of the minimum wage in a city may vary depending on its dominant industries. The broader national economy could have an effect on the results as well. Currently, though, inflation is at historically low levels, and the minimum wage in Seattle will be indexed to inflation after it reaches $15 an hour, forcing firms to plan for the long term.

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About jimbelton

I'm a software developer, and a writer of both fiction and non-fiction, and I blog about movies, books, and philosophy. My interest in religious philosophy and the search for the truth inspires much of my writing.
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