How Seattle’s New Hourly Minimum Wage Might Change the City

by Reihan Salam

Seattle, widely-regarded as one of America’s most attractive, economically vibrant cities, has announced a new plan to raise its local hourly minimum wage to $15 over the next several years. Large employers (over 500 workers) that do not offer employer-sponsored health insurance will have three years to meet the new standard, those that do offer health benefits will have four, and smaller employers will have seven years, with a consideration for tips and health expenditures over the first five of those years. According to a report by Donna Gordon Blankenship, the mayor of Seattle, Ed Murray, described the new initiative as “an historic moment for the city of Seattle,” and he expressed confidence that “we’re going to decrease the poverty rate.”

It is entirely possible that as Seattle’s new minimum wage proposal takes effect, the poverty rate within the city limits will decrease. What remains to be seen, however, is if the new proposal decreases the poverty rate by raising the market incomes of low-wage workers currently residing in Seattle or if it instead prices some number of less-skilled women and men out of Seattle’s housing market by reducing their market incomes, either by forcing them to exit the city’s formal labor market to seek lower-wage employment in neighboring jurisdictions or by encouraging local employers to reduce work hours.

In February, we discussed the phenomenon of workers commuting from jurisdictions with low hourly minimum wages to jurisdictions with high hourly minimum wages, which Kirk Johnson addressed in a New York Times report. It seems likely that a higher hourly minimum wage in Seattle would attract workers from the suburbs, including some mid-skilled workers (retirees, stay-at-home parents, etc.) who now choose not to participate in the formal labor market. This in turn would subject Seattle’s current low-wage workers to more competition. There are, of course many other possible scenarios. It could be that employers will require more intense work effort from employees earning the new hourly minimum, and that current low-wage workers will have no difficulty adapting to the new demands. Or it could be that low-wage employers in nontradable sectors will pass on the cost of increased compensation levels to their customers, and Seattle customers, including low-income Seattle customers, including retirees, part-time workers, and the long-term unemployed, will be indifferent to rising consumer prices, perhaps because transfers will help them maintain their purchasing power.

But the reason I’m skeptical about the poverty-fighting impact of Seattle’s new minimum wage initiative is that Seattle has some of the most stringent local land-use regulations in the United States. The Wharton Residential Land Use Regulation Index (WRLURI) aims to asses variation in the regulation climate of various cities, and it is set so that the average community has an index value of one and the standard deviation is 1. If a city is below zero on the WRLURI, that means that it is actually easier to build housing there than it is in the average U.S. community. If the index is above zero, that means that it is harder.  If a city The following is a list of big cities ranked by the stringency of their local land-use regulations, drawn from a 2007 paper by Wharton economist Joseph Gyourko:

Seattle 2.39 Honolulu 2.32 Austin 2.08 Los Angeles 2 San Francisco 1.96 San Diego 1.59 Phoenix 1.24 Raleigh 1.02 Atlanta 0.7 Denver 0.49 Miami 0.36 Charlotte -0.08 Dallas -0.14 Las Vegas -0.34 Chicago -1.15

As you can see, residential land-use regulation is very stringently regulated in Seattle, or rather it was when the index was constructed in the mid-2000s. Seattle’s local land-use regulations are actually more stringent than San Francisco’s. This contributes to high housing costs in Seattle. When the Census Bureau developed its cost-of-living index for U.S. cities, using a “mid-management standard of living” as its reference point, it found that housing costs 140.3 percent as much in Seattle as the nationwide average. This is far less than in San Francisco (281 percent), but it is quite high all the same.

And high housing costs in Seattle have had consequences for the demographic composition of Seattle. In 2011, The Economist reported on the emigration of native-born African Americans from high-cost U.S. cities and regions to low-cost cities and regions, and they identified Seattle (and Portland) as a vivid illustration of this larger phenomenon. The story observed that though the “total number of blacks in the greater Seattle area has grown in the past decade, but they are widely dispersed to suburbs such as Renton, a dozen miles away.” Between 2000 and 2010, the black population of Seattle proper did actually increase — by 568 people. The non-Hispanic white population, in contrast, increased by 21,046 and the Latino population increased by 10,610. But looking at the black population is a crude measure, as the more interesting question is whether the composition of Seattle’s black population changed over this interval, e.g., it could be that low- and middle-income African Americans have been largely replaced by, for example, more affluent black migrants from other regions, who are employed in the local technology industry, or by less-skilled black immigrants who rely on the informal economy.

One of the more interesting facts about Seattle is that its poverty rate (13.2 percent) is only slightly higher than that of Washington state (12.9 percent), drawing on 2008-2012 data. But the share of children below the poverty level in Seattle as of 2009 (when overall poverty in Seattle was 14.1 percent and statewide poverty was 16.2 percent) is 7.5 percent as opposed to 15.8 percent for the state as a whole. That is, when we focus on children, Seattle’s child poverty rate was strikingly low. Could it be that low-income households with children had been priced out of Seattle proper, and so they had settled in communities like Renton? In 2013, Sohrab Andaz reported that while the number of people living below the poverty line in Seattle, Everett, and Tacoma had increased by 31 percent from 2000 to 2011, the number had increased by 79 percent in Seattle’s suburbs. And so, as of 2011, two-thirds of poor people living in the Seattle metropolitan area were suburbanites.

There is no doubt in my mind that Seattle Mayor Ed Murray believes that a higher minimum wage will benefit Seattle’s low-wage workers. Yet it would be ironic if his initiative in fact reinforced the ways in which Seattle is a “gated city,” which effectively excludes large numbers of poor people through a combination of stringent local land-use regulations (the chief concern of Ryan Avent, author of The Gated City) and local labor market regulations (which, I should stress, Avent does not address in his book, and which he may well support). Poverty in the Seattle area is a largely suburban phenomenon, and it is a suburban phenomenon because the poor have been driven out of Seattle in large numbers of high rents. Even in a happy scenario in which a higher hourly minimum wage leads to higher market incomes for low-wage workers, restrictions on new housing development mean that more income earned by low-income Seattleites will be chasing the same limited stock of low-rent housing. And it’s hard to see a higher hourly minimum wage deterring price-insensitive high-income people from continuing to settle in Seattle. These high-wage workers will continue to gentrify low- and middle-income neighborhoods, putting still more pressure on the low-rent housing stock.

If Mayor Murray wants to fight poverty, he ought to consider making Seattle a more inclusive city. That is, he ought to fight for the relaxation of stringent local land-use regulations. Even if this leads to the construction of new high-end housing, it will greatly reduce the pressure of gentrification on the low-rent housing stock. He should also fight for better national policies that will lead to higher growth and tighter labor markets over local labor market regulations that could harm people with limited skills. There is a reason why some minimum wage advocates focus on how it might curb less-skilled immigration — raising the hourly minimum will make it expensive for employers to take a risk on the young, the less-skilled, and the long-term unemployed.

I will say, however, that it is far better for Seattle to impose a $15 hourly minimum wage than for the United States to sharply increase the federal hourly minimum wage. As Andrew Biggs and Mark J. Perry have argued, a wage floor that wouldn’t have too deleterious an impact in a high-cost, high-wage labor market like Seattle in which it remains substantially below average wages might have a far more deleterious impact in a low-cost, low-wage labor market. Employers in low-cost, low-wage labor markets can’t simply pass on the cost of higher compensation costs to their customers, as incomes in these regions are low. And so employers in these regions have little choice but to economize on labor. The following graphic, prepared by Biggs, Perry, and their colleagues at the American Enterprise Institute, scales the minimum wage to different local labor markets, with $10.10 representing the nationwide cost-of-living average:

I actually think Biggs and Perry might be too sanguine about the impact of higher local minimum wages. But it would certainly be better for Seattle to keep its new wage floor to itself than for the country as a whole to adopt something like it.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.