Seattle Minimum Wage Study

The Seattle city government commissioned a study (pdf) to see what the actual effects were of their increasing the city minimum wage to $13 (bless their hearts, politicians actually tried to evaluate the actual effects of a controversial policy change).  The study authors had access to a uniquely rich data set.  Unlike folks like Card and Kruger, who had to use proxies for low-skill labor employment such as employment in the fast food industry, this study's authors had access to individual wage and hour data by person by location.   The result was one of the highest measured negative net effects of a minimum wage yet calculated:

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.

Note what this means -- the amount of pay raise some low-skill employees got was less than the pay lost by workers who had their hours reduced or eliminated.  This is against a backdrop of a huge boom in Seattle in total employment, meaning that the minimum wage greatly increased income inequality, reducing income to lower-skill workers at the same time higher-skill workers were making a lot more money.  This is not surprising given the data here, which shows the difference between low-income and middle class to be more than 80% due to hours worked, not wage rates.

To some extent, the severity of these results was influenced by the limited region to which the wage applied (making it easier for customers to run for the border, so to speak, to find lower-priced goods and services).  But it is telling that the study with by far the best data shows the biggest negative effects.  To this end, the authors actually evaluate the Card and Krueger approach of looking narrowly at fast food employment, and actually are able to replicate Card and Krueger's results (of limited employment effect of a minimum wage increase in the fast food industry) in Seattle.  This means that Card and Kruger, with their limited proxy, would have said Seattle had no negative employment effects while better more comprehensive data shows the opposite.

Thus, by using the imprecise proxy of all jobs in a stereotypically low-wage industry, prior literature may have substantially underestimated the impact of minimum wage increases on the target population. Finally, column 5 returns to evaluating effects on total hours, but now for all 34 jobs in NAICS 722. While the estimates continue to be insignificant, they are now more negative, averaging -3.3% in the last three quarters. This result is consistent with Neumark and Wascher’s (2000) critique of Card and Krueger (1994).

  • Joshua

    I'm really surprised that the restaurant industry doesn't show any effect. Mark Perry showed a possible effect in 2015. http://www.aei.org/publication/minimum-wage-effect-seattle-area-restaurant-jobs-have-fallen-900-this-year-vs-6200-food-jobs-in-rest-of-state/

  • Does restaurant closings have any (ANY) effect on this issue?
    https://pjmedia.com/instapundit/267734/

  • cc

    Who was the famous economist who talked about the seen and the unseen? what is unseen here is what happens moving forward. No one can prove that the lack of job openings for teens and low skill workers in coming years, and their lack of being able to get a start on the job ladder, is due to this wage increase and it will be blamed on other things, like discrimination.

  • gr8econ

    I went over this study with my Microeconomics class this morning. It fits extremely well with the elasticity and total revenue models that are taught right after supply and demand.

    Assume a downward sloping demand curve with wages as the price and hours as the quantity. Such a demand curve is inelastic on the lower end and elastic at the high end. At the transition point it is unit elastic, which is also the point at which total revenue (total income in this case) is maximized. Note that total income is wages times hours worked.

    In the lower part of the demand curve, if you raise wages, total income increases. That’s because the price (wage rate) goes up faster than the quantity (hours worked) decreases. In the upper part of the demand curve, if you raise wages, total income decreases. That’s because the quantity (hours worked) decreases faster than the price (wage rate) increases. At the transition point where demand is unit elastic the two changes offset each other and total income is unchanged.

    Look at the elasticity estimates on page 31 of the study. Going from $9.47 to $11 was between unit elastic and slightly elastic. Hence little change in total income. Going from $11 to $13 (moving further up the demand curve) the elasticity was about 3. Hence a fairly large decrease in total income.

    Note that a further increase in the wage rate will decrease total income even faster.

    If your objective is to increase low skilled wage rates, then keep increasing the minimum wage. If your objective is to increase low skilled workers’ incomes, decrease the minimum wage.

  • joe - the non economist

    Agree - As a side note a certain Nobel prize winning economist, whose initials are Paul Krugman, frequently cites that Card Krueger 1992/1994 study as proof that the labor market is inelastic with regard to the minimum wage. He continues to cite the study in spite of A) the well known data collection errors in the study,
    B) the absurd increase in employment
    C) acknowledgement in the study that hours worked decreased - the only thing the card krueger study got right,

    Lets see how quickly krugman acknowledges his error - or will he cite the Card Krueger study as proof that the evidence is mixed or that the seattle study was simply a one-off study and is not reflective to the other body of work in this area.

  • Stan Erickson

    Your microeconomics class concentrated on the short-term effects of introducing this law/rate change. It might be that the longer term effects are more important. There could be many, and only one is mentioned here:
    https://uneducatedeconomics.wordpress.com/2017/07/02/minimum-wage-and-maximum-salary/

  • gr8econ

    The longer term effects are lower incomes for low skilled employees and they tend to migrate elsewhere.