Megalextoria

Seattle’s $15 Minimum Wage Experiment Does Not Bode Well for the Rest of Us

In an important article in the Seattle Weekly, Daniel Person summarizes the situation in Seattle pretty well in the title of his exposé “The City Knew the Bad Minimum Wage Report Was Coming Out, So It Called Up Berkeley,” here’s a slice:

Two weeks. Two studies on minimum wage. Two very different results. Last week, a report out of the University of California – Berkeley found “Seattle’s minimum wage ordinance has raised wages for low-paid workers, without negatively affecting employment,” in the words of the Mayor’s Office. That report, produced by the Center on Wage and Employment Dynamics at Berkeley, was picked up far and wide as proof that the doomsday scenarios predicted by skeptics of the plan were failing to materialize.

And while another study that came out Monday from researchers at the University of Washington (UW) doesn’t exactly spell doomsday either, it wasn’t exactly rosy. “UW study finds Seattle’s minimum wage is costing jobs,” read the Seattle Times headline Monday morning. The study found that while wages for low-earners rose by 3 percent since the law went into effect, hours for those works dropped by 9 percent. The average worker making less than $19 an hour in Seattle has seen a total loss of $125 a month since the law went into effect.

There’s an old joke that economics is the only field where two people can win the Nobel Prize for saying the exact opposite thing. However, by all appearances, these two takeaways on Seattle’s historic minimum wage law are not a symptom of the vagaries of a social science but an object lesson in how quickly data can get weaponized in political debates like Seattle’s minimum wage fight. In short, the Mayor’s Office knew the unflattering UW report was coming out and reached out to other researchers to kick the tires on what threatened to be a damaging report to a central achievement of Ed Murray’s tenure as mayor.

And here’s the key takeaway of what Person uncovered:

To review, the timeline seems to have gone like this: The UW shares with City Hall an early draft of its study showing the minimum wage law is hurting the workers it was meant to help; the mayor’s office shares the study with researchers known to be sympathetic toward minimum wage laws, asking for feedback; those researchers release a report that’s high on Seattle’s minimum wage law just a week before the negative report comes out.

In other words, if you don’t like an unflattering study from a team of researchers from the local university that accurately exposes some of the negative employment effects of the city of Seattle’s $15 minimum wage, you shop around – out of state in this case — for a more favorable study of that questionable and risky public policy experiment.

And what didn’t the Seattle mayor’s office like about the UW study? Let’s find out by looking at some of the key findings of the 63-page NBER study “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle” by Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor and Hilary Wething (all six are professors in the Daniel J. Evans School of Public Policy and Governance at the University of Washington). The selected excerpts below help tell the story that the city of Seattle didn’t want to hear (emphasis added):

Abstract:

This paper evaluates the wage, employment, and hours effects of the first and second phase-in of the Seattle Minimum Wage Ordinance, which raised the minimum wage from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016. Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude 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.

Conclusion:

Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs. These estimates are robust to cutoffs other than $19. A 3.1% increase in wages in jobs that paid less than $19 coupled with a 9.4% loss in hours yields a labor demand elasticity of roughly -3.0, and this large elasticity estimate is robust to other cutoffs.

These results suggest a fundamental rethinking of the nature of low-wage work. Prior elasticity estimates in the range from zero to -0.2 suggest there are few suitable substitutes for low-wage employees, that firms faced with labor cost increases have little option but to raise their wage bill. Seattle data show that payroll expenses on workers earning under $19 per hour either rose minimally or fell as the minimum wage increased from $9.47 to $13 in just over nine months. An elasticity of -3.0 suggests that low-wage labor is a more substitutable, expendable factor of production. The work of least-paid workers might be performed more efficiently by more skilled and experienced workers commanding a substantially higher wage. This work could, in some circumstances, be automated. In other circumstances, employers may conclude that the work of least-paid workers need not be done at all.

Importantly, the lost income associated with the hours reductions exceeds the gain associated with the net wage increase of 3.1%. Using data in Table 3, we compute that the average low-wage employee was paid $1,897 per month. The reduction in hours would cost the average employee $179 per month, while the wage increase would recoup only $54 of this loss, leaving a net loss of $125 per month (6.6%), which is sizable for a low-wage worker.

Here’s one thing the UW study didn’t consider yet, because it’s too early: The additional $2 an hour increase in the city’s minimum wage that just took effect on January 1 of this year from $13 to $15 an hour for large employers. Once local employers feel the full effect of the 58% increase in labor costs for minimum wage workers from $9.47 to $15 an hour  in less than two years, it’s likely the negative employment effects uncovered by the UW team for 2016 will continue this year and into the future, and could likely increase.

Here’s some additional commentary on the developing Seattle minimum wage story:

1. The Seattle Times Editorial Board warns that “Seattle should open its eyes to minimum-wage research.”

Murray’s office said it had concerns about the “methodology” of the UW study. But the strategy is clear and galling: celebrate the research that fits your political agenda, and tear down the research that doesn’t.

The minimum-wage experiment sweeping the country needs good, thorough, independent research. Seattle led this movement, passing the highest local minimum wage in the country. Does City Hall really want to know the consequences, or does it want to put blinders on and pat itself on the back?

2. Forbes contributor Tim Worstall writes today that “As I Predicted, Seattle’s Minimum Wage Rise Is Reducing Employment.”

3. Max Ehrenfreund writes in today’s Washington Post that “A ‘very credible’ new study on Seattle’s $15 minimum wage has bad news for liberals.”

4. Ben Casselman and Kathryn Casteel express their concerns in FiveThirtyEight that “Seattle’s Minimum Wage Hike May Have Gone Too Far.” Here’s a slice:

In January 2016, Seattle’s minimum wage jumped from $11 an hour to $13 for large employers, the second big increase in less than a year. New research released Monday by a team of economists at the University of Washington suggests the wage hike may have come at a significant cost: The increase led to steep declines in employment for low-wage workers, and a drop in hours for those who kept their jobs. Crucially, the negative impact of lost jobs and hours more than offset the benefits of higher wages — on average, low-wage workers earned $125 per month less because of the higher wage, a small but significant decline.

“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, a University of Washington economist who was 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.”

“This is a ‘canary in the coal mine’ moment,” said David Autor, an MIT economist who wasn’t involved in the Seattle research. Autor noted that high-cost cities such as Seattle are the places that should be in the best position to absorb the impact of a high minimum wage. So if the policy is hurting workers there — and Autor stressed that the Washington report is just one study — that could signal trouble as the recent wage hikes take effect in lower-cost parts of the country.

“Nobody in their right mind would say that raising the minimum wage to $25 an hour would have no effect on employment,” Autor said. “The question is where is the point where it becomes relevant. And apparently in Seattle, it’s around $13.”

Bottom Line:

If booming, high cost-of-living Seattle had a hard time absorbing a $13 an hour minimum wage last year without experiencing negative employment effects (reduced hours, jobs and earnings for low-wage workers), it will have an even more difficult time dealing with the additional $2 an hour increase that took place on January 1 without even greater negative consequences. And if Seattle’s risky experiment with a $15 an hour minimum wage represents the “canary in the coal mine” for cities around the country that want to increase their minimum wages to $15 an hour, those cities may want to hold off for a few years to get a final count of the “dead canaries” in Seattle before proceeding.

Reprinted from AEI.

Mark J. Perry

Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.

This article was originally published on FEE.org. Read the original article.

Seattle’s Minimum Wage Hurt Low-Income Workers the Most

When I debate my leftist friends on the minimum wage, it’s often a strange experience. When other people are listening or watching, they’ll adopt a very extreme position and basically claim that politicians have the power to dramatically boost take-home pay by simply mandating higher levels of pay. And somehow there won’t be any noticeable negative impact on employment and labor markets, even though businesses only create jobs if they expect some net profit.

But when we talk privately, they have a more nuanced argument. They’ll confess that higher minimum wages will cause some low-skilled workers to become unemployed, but then justify that outcome using either or both of these arguments.

• Amoral utilitarianism – A large number of people will get pay raises and only a small handful will lose their jobs,  and this is okay if policy is based on some notion of greatest good for the greatest number. In other words, you can’t make an omelet without breaking a few eggs.

• Keynesian stimulus – Some people will lose their jobs, but the income gains for those who keep their jobs will boost “aggregate demand” and thus provide a boost for the economy. Sort of like they also claim giving people unemployment benefits will somehow generate more economic activity.

I’ve always rejected the first argument because I believe in the individual right of contract. The government should not prevent an employer and employee from engaging in voluntary exchange.

And I’ve always rejected the second argument because there can’t be any net “stimulus” since any additional income for workers is automatically offset by less income for employers.

So who is right?

A Real World Failure

Well, the real world just kicked advocates of higher minimum wages in the teeth. Or maybe even someplace even more painful. A new study from the National Bureau of Economic Research looks at the impact of the $11 and $13 minimum wages in the city of Seattle and finds very bad results.

Let’s start by simply citing what the local government did.

This paper, using rich administrative data on employment, earnings and hours in Washington State, re-examines this prediction in the context of Seattle’s minimum wage increases from $9.47 to $11/hour in April 2015 and to $13/hour in January 2016.

And here’s a table from the study, showing details on the minimum-wage mandate.

And what’s been happening as a result of this intervention in the labor market?

Unsurprisingly, the jump to $13 has been much more damaging than the jump to $11.

…conclusion: employment losses associated with Seattle’s mandated wage increases are in fact large enough to have resulted in net reductions in payroll expenses – and total employee earnings – in the low-wage job market. …We show that the impact of Seattle’s minimum wage increase on wage levels is much smaller than the statutory increase, reflecting the fact that most affected low-wage workers were already earning more than the statutory minimum at baseline. Our estimates imply, then, that conventionally calculated elasticities are substantially underestimated. Our preferred estimates suggest that the rise from $9.47 to $11 produced disemployment effects that approximately offset wage effects, with elasticity estimates around -1. The subsequent increase to as much as $13 yielded more substantial disemployment effects, with net elasticity estimates closer to -3.

Here’s a chart from the study looking at the impact on hours worked.

If you want a healthy labor market, it’s not good to be below the line.

And here’s some of the explanatory text.

…Because the estimated magnitude of employment losses exceeds the magnitude of wage gains in the second phase-in period, we would expect a decline in total payroll for jobs paying under $13 per hour relative to baseline. Indeed, we observe this decline in first-differences when comparing “peak” calendar quarters, as shown in Table 3 above. …point estimates suggest payroll declines of 4.0% to 7.6% (averaging 5.8%) during the second phase-in period. This implies that the minimum wage increase to $13 from the baseline level of $9.47 reduced income paid to low-wage employees of single-location Seattle businesses by roughly $120 million on an annual basis. …Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs.

But the biggest takeaway from the report is that hours dropped so much that the average low-wage worker wound up with less income.

The reduction in hours would cost the average employee $179 per month, while the wage increase would recoup only $54 of this loss, leaving a net loss of $125 per month (6.6%), which is sizable for a low-wage worker.

Here’s the relevant chart.

Once again, it’s not good to be below the line.

Higher Wages, Lower Incomes

This data is remarkable because it shows that higher minimum wages are a bad idea, even according to the metrics of our friends on the left.

• The amoral utlitarianism argument doesn’t apply because it’s no longer possible to claim that income gains for those keeping jobs will more than offset income losses for those who become unemployed.
• The Keynesian aggregate-demand argument doesn’t apply because it’s no longer possible to assert macroeconomic benefits based on the assumption of a net increase in “spending power” in the economy.

Let’s close with a couple of observations from others who have looked at the new study.

Diana Furchtgott-Roth of the Manhattan Institute (and formerly Chief Economist at the Department of Labor) highlights the most relevant findings.

Raising the pay floor has led to net losses in payroll expenses and worker incomes for low-wage workers. …When hourly wages rose from $11 to $13 in 2016, hours of work and earnings for low-wage workers were reduced by 9 percent for the first three calendar quarters, resulting in 3.5 million fewer hours worked for each calendar quarter.  The number of jobs declined by 7 percent, with the result that 5,000 jobs were lost. …The evidence shows that in Seattle, low-wage workers got less money in their pockets, rather than more.

Some proponents of intervention and mandates may want to dismiss Diana’s analysis because of her reputation as a market-friendly scholar.

But even Ben Casselman and Kathryn Casteel of FiveThirtyEight basically reach the same conclusion.

As cities across the country pushed their minimum wages to untested heights in recent years, some economists began to ask: How high is too high? Seattle, with its highest-in-the-country minimum wage, may have hit that limit. …New research released Monday by a team of economists at the University of Washington suggests the wage hike may have come at a significant cost: The increase led to steep declines in employment for low-wage workers, and a drop in hours for those who kept their jobs. Crucially, the negative impact of lost jobs and hours more than offset the benefits of higher wages – on average, low-wage workers earned $125 per month less because of the higher wage.

Just Be Honest

I’m amused to find more evidence that left-leaning economists admit that higher minimum wages cause damage, albeit never on the record.

Even some liberal economists have expressed concern, often privately, that employers might respond differently to a minimum wage of $12 or $15, which would affect a far broader swath of workers.

I’m wondering how they can look at themselves in the mirror. It seems very immoral (in other words, beyond amoral) to publicly defend a policy that you privately admit is bad.

I understand that this type of dishonesty happens all the time in the political world (for example, some Republicans are now supporting Trump’s plans for infrastructure boondoggles and parental leave when they would have been strongly opposed if the same policies had been proposed by Obama).

But what’s the point of being a tenured academic if you can’t at least be honest?

Though maybe there’s some sort of cognitive dissonance at play, where they feel the rules of honesty don’t apply in the political world. For instance, both Paul Krugman and Larry Summers have acknowledged in their academic work that unemployment benefits lead to more unemployment. But they pretend that’s not the case when commenting on the policy debate.

But I’m digressing. Let’s close by recycling this video on minimum wages from the Center for Prosperity.

P.S. If you want some minimum-wage themed humor, you can enjoy cartoons here, here, here, here, and here.

Reprinted from International Liberty.

Daniel J. Mitchell

Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

This article was originally published on FEE.org. Read the original article.