A working paper for the National Bureau of Economic Research by a University of Washington team — the same team hired by Seattle to evaluate its minimum-wage experiment — just found serious ill effects:
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. Evidence attributes more modest effects to the first wage increase. We estimate an effect of zero when analyzing employment in the restaurant industry at all wage levels, comparable to many prior studies.
A Jonathan Meer post reprinted by Alex Tabarrok spells out just how bad that news is:
– The numbers of hours worked by low-wage workers fell by *3.5 million hours per quarter*. This was reflected both in thousands of job losses and reductions in hours worked by those who retained their jobs.
– The losses were so dramatic that this increase ‘reduced income paid to low-wage employees of single-location Seattle businesses by roughly $120 million on an annual basis.’ On average, low-wage workers *lost* $125 per month….
I know that so many people just desperately want to believe that the minimum wage is a free lunch. It’s not. These job losses will only get worse as the minimum wage climbs higher, and this team is working on linking to demographic data to examine who the losers from this policy are. I fully expect that these losses are borne most heavily by low-income and minority households.
But there’s more. When Seattle’s City Hall got word the adverse study was coming from members of its own research team, it quickly commissioned a pro-labor group at Berkeley to do a counter-study looking at restaurants and concluding that everything was peachy keen [Seattle Weekly] “Does City Hall really want to know the consequences, or does it want to put blinders on and pat itself on the back?” [Seattle Times editorial]
One other takeaway from the NBER: the low-wage-earner losses weren’t in restaurant jobs, which are far less mobile. Few Seattle city residents will switch to suburban eateries for everyday dining, even in response to relative shifts in cost or quality. But many blue-collar and clerical jobs can migrate to suburbs or locations farther away than that. In short, beware of restaurant-sector-only studies of local minimum wage effects, which will typically understate damage to hours worked.
More: Ben Casselman and Kathryn Casteel, Five Thirty-Eight; Max Ehrenfreund/Washington Post; Michael Saltsman/Forbes (“New Report Marks The Beginning Of The End For ‘Fight For $15′”); Ryan Bourne, Cato.
25 Comments
So Economics 101 is validated by yet another study.
Now the shortfall in wages (and tax base) will be filled by many of these people going on public assistance, and the politicians will be heroes to them for having a safety net for the unemployed.
Good going!
The author of the study seems to believe that there might be another factor that affected the results. That is, there is a great competition for jobs leading to the rising wages (and lessening of jobs at the minimum wage level). The problem is that the control group for the study may have been flawed, as it consisted of other cities in Washington, which is not a good comparison because Seattle is unique in Washington.
VMS makes a good point. If the researcher’s conclusion is correct, i.e., higher minimum wage is adversely affecting the number of low wage jobs, it could be confirmed by showing that there are more people on public assistance or more people unemployed,
Interestingly, conservative economists would probably agree that competition for workers should/would do the same as a minimum wage hike. It is the basic law of supply and demand. Consequently, if Seattle has a low unemployment rate, wages would be expected to rise. In other words, in Seattle, a rise in minimum wage would have almost no effect.
Another reason there might be more competition for workers and rising wages is the current administration’s immigration policy. The fewer immigrants (legal or otherwise) competing for jobs, the lower the supply of workers, and the more likely for wages to rise.
I would like to point out the irony with many touting this study. The same people who say global warming is a conspiracy and there needs to be more research think that this study is the be all to end all on minimum wage. (And no, I do not believe Mr. Olson falls into this group.)
Finally, I support the scientific method. Lets get hypotheses out there and collect data to prove or disprove them. In this case, my hypothesis is that raising the minimum wage will not be harmful to the economy as a whole, but I am open to considering valid data disproving my belief.
Alan,
You are conflating too very different situations with very different effects.
1. Workers competing for jobs.
2. Employers competing for workers.
The wording of your first paragraph, “That is, there is a great competition for jobs” implies #1, but #1 doesn’t lead to increasing wages, it leads to decreasing wages.
Your third and fourth paragraphs seem to be referring to #2. No, #2 does not have the same effects as a minimum wage hike.
Yes the law of supply and demand works quite well if you look at it correctly, but you clearly have it backwards.
Employers / job openings are the demand and workers are the supply, not the other way around.
Employers competing for workers leads to higher wages, because the demand for labor is higher than the supply. If the reverse situation obtained, workers competing for jobs, that indicates that the supply of labor is higher than the demand for labor and the price that labor commands must decline.
Minimum wages violate the law of supply and demand. The artificial increase in labor prices will reduce demand (job openings) while at least temporarily increasing the supply of workers.
I apologize for confusion. I would agree that economists who view labor as a market see workers as the supply part and jobs as the demand part.
My point is that: if demand is high and supply is low, the price goes up. If there is a labor market, this would mean that wages would rise. That would be happening in Seattle. Minimum wage laws are an artificial means to attempt to alter the market. However, if the market already dictates higher wages, as in Seattle, the minimum wage would have a very small impact.
What we really would need to do is examine the affect of minimum wage hikes on communities with already high unemployment rates. Perhaps abolish minimum wage in one area and increase the minimum wage in another. My guess, if the areas are close enough together, is that the higher wage areas will have full employment, better workers, and higher prices (with, perhaps, fewer jobs), while the lower wage areas would have trouble filling jobs, less desirable workers, and lower prices (with, perhaps, more jobs ). Then we could see where the consumers want to spend their money.
“My point is that: if demand is high and supply is low, the price goes up. If there is a labor market, this would mean that wages would rise. ”
Your understanding is drastically flawed. The existence of a labor market does not prove that demand is high and supply is low. A labor market exists as long as there is any employment.
“That would be happening in Seattle.”
Yes, high labor demand and low supply will equal rising wages, but you assume with no evidence that this is the case for Seattle.
“However, if the market already dictates higher wages, as in Seattle, the minimum wage would have a very small impact.”
It is true that a minimum wage below the prevailing entry level wage for unskilled labor would have little to no impact.
However, if prevailing entry level wages were already above the proposed minimum, why did they pass it in the first place. There is no upside to doing so and a huge downside if the economy sours.
Of course there is a potential upside to raising the minimum wage. there is also a potential downside. That is the case with every economic idea.
What you seem to be against is a state mandated scheme to attempt to redistribute economic benefits. Fine. Some people are for it and present a case that it is the tide that lifts all boats. That is, an economic policy that makes the pie bigger and increases one group’s percentage of the pie, while not decreasing the actual pie received by any one group, is a good thing. Heck, even Ronald Reagan believed that. The question is not whether we want to make the pie bigger, but how much of the extra pie everyone gets.
Your argument is that raising the minimum wage does not increase the pie, and might decrease it, but, in any case, it does not achieve the goal of ensuring distribution in the manner it intends. Fine. Prove it. I just do not see the data to support the conclusion (or to disprove it, either).
Alan,
It’s basic economics 101, the law of supply and demand. If you artificially increase the price of any good or service above the normal equilibrium price, then demand for that good or service must decrease.
Labor is not exempt from this.
Matt, that is not quite true. There is the concept of elasticity.
Also, you are looking only at the demand side for labor as prices increase. Perhaps the demand side will increase the number of jobs because there is more demand for products as the lower income people make more money. That is, as the pie grows, there is a need for more ingredients.
This was one of the theories behind the staggering growth of the US economy last century. As the middle class expanded, demand for products grew, resulting in demand for more workers, ultimately leading to an increase in everyone’s standard of living.
“Perhaps the demand side will increase the number of jobs because there is more demand for products as the lower income people make more money. ”
No, a minimum wage increase will not increase aggregate income for lower income people. While some will see an increase, others will loose their jobs as their labor isn’t worth the new price.
“This was one of the theories behind the staggering growth of the US economy last century. As the middle class expanded, demand for products grew, resulting in demand for more workers, ultimately leading to an increase in everyone’s standard of living.”
Very true, but that all happened naturally though normal market mechanisms. A minimum wage increase can not have that effect. The effect can not be forced.
Matt,
We can agree to disagree.
The industrialists of the late 18th and early 19th century would have agreed with you. They opposed unions and the entire New Deal, in part because they would compel changes to the labor market.
I hypothesize that, without some sort of market correcting action (be it by workers or the government), the labor market will never operate at its maximum efficiency. People with capital simply have no incentive to take a chance on promoting change when simply staying where they are will keep them fat and happy.
If the powerful would somehow be persuaded that what is good for the masses is better for them, then perhaps there would be a change. Until then, we either have to artificially disrupt the market or forever have massive inequality.
Allan,
I was unaware that the New Deal was part of the 18th or 19th century. However, the New Deal did not do what it promised, and many economists believe the New Deal prolonged the Great Recession. (Without those same industrialists that you seem to despise, the US never would have built the large infrastructure project prior to WWII and never would have won WWII.)
What you hypothesize in terms of the market is not reality. People with capital and corporations take chances every single day. Whether it is a new product, a new location or even the hiring of a new employee, all are risks to the business. Most companies want to grow and expand. The few that don’t do so for reasons other than the market or wanting to “sit on their money.” You, like unions, would rather control the company and its owners with no economic skin in the game. Instead of putting money into the business, you want to take it out.
Secondly, your ideology is premised on the idea that companies exist to provide workers with income. That’s not true. There isn’t a business owner who started a business who didn’t think the company would provide income (more income) and a better life for him (or her) and his (or her) family. Companies exist to provide income for the owners – the people who took a chance (the very chance you say people don’t take.)
Finally, when you say “if the powerful would somehow be persuaded that what is good for the masses is better for them….” it seems that you think a small to middle sized business owner is raking in the dough. When I started my company, I was working over 70 hours a week. I don’t consider myself be powerful, but when and others of your ilk tell me that if I hire someone, I have to pay them a certain wage, you make the claim that I am part of “the powerful.” That’s fantasy.
Somehow the very economic freedoms on which this country was founded are anathema to you. You would have businesses and owners be slaves to the whims of the government in order to meet some sort of mythical “equality” that can never be achieved as the moment people realize they can take from others with impunity, they simply want more.
The very pie you keep extolling “grows” when businesses are left alone and not forced to act in manners that harm them.
18th to 20th centuries…
I do not despise industrialists. I disagree with their theories on how to grow the economy. The object should be to make the industrialists richer. I believe that is best achieved by having a robust middle class, not encouraging short term profits and paying the lowest wage possible. Of course, this is in the aggregate. No company can be expected to succeed if it tried this alone (unless it was a monopoly or, at least, had a very large share of the market).
Yes, companies today exist to provide income for their owners That is how the law is written. Perhaps, however, we would be better off if companies were also told to be good citizens. I do not know how that would work and can think of many ways it would make things worse.
Perhaps the first thing to do is figure out how to punish companies more effectively. For example, Carl’s Junior was just found to have stolen wages from its employees. The company admits it underpaid its employees, but claims it was just an accounting error. Whether one believes the explanation depends on how credible one believes the company is. But, even assuming that it was not an honest mistake, the penalties are miniscule. Somehow punishment should be more effective.
You can disagree with industrialists all you want. Their responsibility is not to “grow the economy.” What you are saying is akin to “I disagree with keeping donkeys because they are not horses.”
Yes, companies today exist to provide income for their owners That is how the law is written.
The “law” recognizes the basic rights of people. They have a right to work and provide for their families. This is not new. Do you think that Og the caveman had to give up the meat he had gone out and hunted because others wanted it? Do you think that country farmers had a duty to hire workers for their fields, or were the workers hired to create more goods and therefore more profit? They have no duty to provide for others. The only duty is to make an exchange of goods and services that both parties can agree to and like. You seem to want to codify stealing from owners and investors to go to someone else. I am always stunned by your insistence of making business owners slaves.
But, even assuming that it was not an honest mistake, the penalties are miniscule. Somehow punishment should be more effective.
The Carl’s Jr case shows the problem with companies having to comply with different legislative thieves. The company cannot have a single payroll for all employees and has to take into account which city, state and county are taking more money from them.
But your assertion that the penalties are “minuscule” is ridiculous on its face. The company was found to have not paid 37 workers a total of $5,400. For that the company is being fined $1.45 MILLION.
Of that, $900,000 will go to the workers.
So the workers who were out an average of $154 will get $23, 343, Plus the City of LA will get $541,000 for it’s part in this.
No reasonable person can think that is a reasonable or just fine, (much less minuscule) even assuming that Carls Jr withheld the pay intentionally (and there is NO evidence they did.)
Finally, I noticed that you failed to address how me and my little company are considered “the powerful” to the point where you think you and the government has the right to come in and steal from me or make me a slave to your whims and what you think is “fair.”. You have never addressed why the government has any legal right to interfere with a contract between two consenting parties when it comes to wages, benefits, etc.
You, like so many people, seem to think that businesses print money or get it from some unlimited source.
When you go out and buy a product, do you look for the lowest price? We know you do and you do so because you want to keep more money in your pocket. Somehow you think that is a good idea for you, but when businesses try to save money on goods and labor, they are horrible, greedy individuals.
“18th to 20th centuries…” You are still way off.
The New Deal is entirely a product of FDR from the Great Depression in the 1930s. There were no living 18th century industrialists to oppose it..
“The object should be to make the industrialists richer. I believe that is best achieved by having a robust middle class”
Of course none of the economic policies you support are capable of either creating or preserving a robust middle class.
Allan,
achieving your worker’s paradise seems easy. All they need to do is buy stock in the companies they work for. By keeping the stock closely held, they have nothing but their long term sustainability and profitability to concern themselves with, thus avoiding the short term profit taking of some of the larger traders. As well, as shareholders, they’d have a say in executive compensation, and potentially, their own. Of course, history is littered with the corpses of companies whose shareholding employees bankrupted their employers. It look an awful lot like public unions bankrupting the political entities they work for – when you bargain with yourself, short term gains tend to come to the fore.
There doesn’t seem to be an easy solution – inequality is the natural state of mankind, and every system yet tried to combat it seems to be quickly corrupted for the benefit of the very few. Capitalism, at least, is honest enough to try and encourage greed and self enrichment for the benefit of society as a whole. The alternative theories out there, mostly shades of Socialism, seem to pretend man is some benevolent being, and tend to rapidly collapse into some form of central planning run by dictators, oligarchs, or the like.
Carlitguy,
Where would they get the money to buy the stock?
History is also littered with the corpses of companies who have gone bankrupt where they were raped and pillaged by the stockholders. Also Ponzi schemes.
I do agree that there is no easy solution.
They could buy stock with their wages?
I refuse to believe that “labor” as you would have it is flat broke, completely without purchasing power, stupid, uneducated, and in all other ways unable to look out for their individual interests as employees, completely dependent on the State to protect them. Granted, some will individuals will be better at looking out for their own interests than others, just as some employers will be better than others – but I’m not so paternalistic as to set myself up as a god looking out for them for “their own good”. Somehow, I doubt you have the skill set either. All I hear from you, generally, is “more more more”, its never enough…
Treat employees like human beings, they may surprise you.
“Where would they get the money to buy the stock? ”
My father was a union meter reader fro a publicly traded Electric utility. Part of his compensation package was stock options.
Where would they get the money to buy the stock?
As CarLitGuy says, you have a tremendous lack of faith in the worker and believe that you, people of your ilk, and the government are the only ones that can tell them what is in their best interests.
As you keep reminding us, there is another player in this game as well: UNIONS.
Why shouldn’t unions be able to purchase stock? With the amount of money coming in from forced dues, can’t the union by stock in the name of their members?
At least then the unions would have actual skin in the game.
History is also littered with the corpses of companies who have gone bankrupt where they were raped and pillaged by the stockholders.
And your point?
For every company you can point to, I can point to one where the company was raped and pillaged and forced to close because of union demands to the point where the company no longer could survive in the market.
Gitarcarver,
it was actually unions I was thinking of when I mentioned companies being raped and pillaged into bankruptcy by their stockholders. I lived thru the destruction of the health car provider with a car company attached. Certainly that wasn’t the only reason the company went under – structural failings pervaded the business, but Unions had a lot to do with their unsustainable cost structure and their inflexibility, and their stock voting block gave them substantial influence over long term strategic decisions.
Sorry I was less than clear in that passing reference.
“the labor market will never operate at its maximum efficiency. ”
Sorry, when there are more job openings than available labor can fill, wages go up and working conditions improve. When there are more laborers looking for work than job openings, wages go down and working conditions degrade. In both cases, the labor market is being efficient.
The whole problem is that you and other progressives don’t understand what efficiency means in terms of free markets.
The problem is the unscrupulous who steal from their laborers. And, yes, they are out there.
This is not a result of an inefficient market. In an efficient market, everyone is operating with the same level of knowledge and the same level of power. The labor market in the US does not run that way. Workers do not know their rights, either because they have not been taught or because they lack the intellectual capacity to learn. And they are taken advantage of.
I would hypothesize that the owners of businesses, in the aggregate, are better educated and have higher intellectual functioning than their workers. Many of those take advantage of this, not by building a better mousetrap, but by cheating others into thinking they built a better mousetrap. Of course, that does not apply to everyone. But it applies to enough of them to make a difference, especially on the margins.
“The problem is the unscrupulous who steal from their laborers. And, yes, they are out there. ”
Yes, they are, However:
1. I do not believe that they are even half as common as you think they are, and I rather doubt that you can produce any evidence to support any claim that such unscrupulous business owners are that common.
2. Minimum wage laws do nothing to correct either the information/power imbalance or the problem of business owners who would deliberately cheat their workers.
“Minimum wage laws do nothing to correct either the information/power imbalance or the problem of business owners who would deliberately cheat their workers.”
True enough. But because there is an information/power imbalance, perhaps we should think about ways to put both sides of the market on equal footing.
As for stealing for laborers, you keep hearing about it at the lower end of the wage scale. If you have 1,000 workers, saving $10/worker per day is kind of lucrative. What I hear about is anecdotal. It seems to me to be pervasive. However, that may just be my sources.
It is the result of an inefficient market. In your view, labor is too stupid to be entrusted with their own well being, and need the State to swoop in and protect them from themselves. Given that the State is in part responsible for some of the perversions in the marketplace that protect certain companies from meaningful competition, and given the history of State controlled production generally, I’m not so trusting of “the System” to do as you propose. In the State’s hands, the power to protect is often the power to destroy, and that is how the few most often put it to use – for their own benefit, of course.