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The Agenda

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

Who Will Win and Who Will Lose from Seattle’s New Minimum Wage Hike?



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Earlier this month, I offered thoughts on Seattle’s minimum wage hike, and I mentioned the fact that poverty in the Seattle metropolitan area is concentrated in its suburban regions. Alan Berube of the Brookings Institution writes on a similar theme, yet in his effort to put a positive spin on Seattle’s new wage floor, he neglects to think through the potential consequences. Drawing on American Community Survey, Berube and his colleague Sid Kulkarni found that between 2009 and 2011, there were on average 149,000 jobs (full-time and part-time) in Seattle proper that paid less than $15 per hour, or 30 percent of all jobs in Seattle, while suburban King County had an average of 216,000 jobs, or 34 percent of all jobs in the region, falling in the same category.

Berube makes the point that many suburbanites will benefit from Seattle’s new minimum wage, as they will work within the city limits. Yet Berube doesn’t explore the possibility that better-trained or more highly motivated suburban workers might displace their low-wage counterparts currently residing in Seattle. Assuming Seattle’s new minimum wage doesn’t dramatically increase the demand for low-wage workers, which seems unlikely given that the new minimum wage will greatly increase the cost of employing such workers, it is easy to imagine that we’d see at least some displacement along these lines. Berube cites a University of Washington analysis of the minimum wage hike, and it is fascinating. Among other things, it finds that an increase in the minimum wage to $15 per hour will reduce poverty in Seattle from 13.6 percent to 9.4 percent if employment and hours don’t change, which is to say this number is utterly useless, as it assumes away the central question, which is whether raising the price of low-wage labor will lead local employers to demand more work effort and substitute capital for labor. The report does, however, include this helpful chart.

 

Workers in Seattle <=$9.32 $9.33-12.12 $12.13-15 $15.01-18 Over $18 Total $15 or under
Live and Work in Seattle 11% 9% 9% 8% 64% 20%
Live in Seattle, Work Outside 15% 9% 9% 8% 59% 33%
Live outside Seattle, Work in Seattle 7% 6% 6% 8% 73% 19%

The absolute numbers are also instructive:

 

Workers in Seattle <=$9.32 $9.33-12.12 $12.13-15 $15.01-18 Over $18 All Workers
Live and Work in Seattle 23,112 19,067 17,871 16,077 133,387 209,514
Live in Seattle, Work Outside 18,824 10,717 11,756 9,404 74,243 124,944
Live outside Seattle, Work in Seattle 14,803 13,753 13,103 18,196 160,899 220,754
Total Seattle residents 41,936 29,784 29,627 25,481 207,630 334,458
Total Workers in Seattle 37,915 32,820 30,974 34,273 294,286 430,268

Let’s consider what might happen to the 11 percent of those who live and work in Seattle (23,112) who are currently earning $9.32 per hour or less. Is it safe to assume that employment and hours won’t change for these workers, or their future counterparts, as the new wage floor takes effect? The 9 percent of those who live and work in Seattle who are currently earning between $12.13 and $15 might not be affected (19,067), but one assumes that those workers who are further down the wage ladder will have a different experience, not least because these workers who live and work in Seattle will face new competition from low-wage workers who live in Seattle yet who currently work low-wage jobs outside of the city (many of whom will find a shorter commute attractive, particularly it comes with a wage increase) and, of course, from workers who live outside Seattle and will now find it worth their while to travel into the city. What will happen to these displaced Seattle residents? If they see a reduction in hours or if they lose their jobs outright, they’d see their market incomes drop to the point where they might no longer be able to afford to live in Seattle, or they’ll depend on transfers to pay for scarce low-rent housing. The net result might be a sharpening of the phenomenon Berube has identified, namely that poverty in the Seattle region is concentrated in the suburbs, as low-wage Seattleites are forced to leave their city to find more affordable accommodation.

My impression is that the minimum wage hike will make the Seattle region more rather than less economically segregated, and it will deepen the tendency towards labor market polarization as a nontrivial number of workers, starting with those who command a market wage of $9.32 or less, will find themselves locked out of formal employment.

In Making Progressive Politics Work, Lane Kenworthy has a brief chapter on low-wage work, which includes the following passage:

Even if we do a superb job with schooling, high-end services won’t employ everyone. Imagine a high-skill, high-employment economy of the future with 85% of the working-age population in paid work. Suppose 65% complete university and end up in high-end service jobs. That optimistic scenario still leaves 20% in other jobs. Some will work in manufacturing or farming, but what of the rest?

They could work in low-end services. However, some favour minimising such jobs. One way to do that is to set the wage floor at a very high level, perhaps supplemented by heavy payroll taxes, in order to reduce employer demand for low-end positions. Another possibility is to offer an unconditional basic income grant at a level generous enough to reduce the supply of people willing to work in a low-paying job.

I don’t think that’s the best way to proceed. As we get richer, most of us are willing to outsource more tasks that we don’t have time or expertise or desire to do ourselves – changing the oil in the car, mowing the lawn, cleaning, cooking, caring for children and other family members, advising, educating, organising, managing, transporting. And improved productivity and lower costs abroad will reduce the price we pay for food, manufactured goods, and some services, leaving us with more disposable income. So we’ll want more people teaching pre-school children, helping others find their way in the labour market or through a midlife career transition, caring for the elderly, and so on, and we will be better able to purchase such services. If there is demand for these services and a supply of people willing to perform them, why discourage them?

These types of jobs can be especially valuable for the young and immigrants, two groups who tend to struggle in the labour market. Some low-end service jobs will be in the public sector, but not all. To facilitate low-end service employment in the private sector, we need a modest wage floor, modest payroll taxes, and social programmes that encourage and support employment. [Emphasis added]

There is much wisdom in this brief passage. For politicians, talk is cheap, and so are minimum wage hikes. The costs of minimum wage hikes are borne by employers and by the workers who are excluded from the labor market, or who find their hours reduced, as employers demand greater productivity from their more expensive workforce. Employment-conditional earnings subsidies are a far more effective way to alleviate poverty than statutory wage floors, but they cost money. We need to get over our aversion to spending money in a transparent, above-board way when the alternative is forcing poor people to bear the cost of our political posturing — our desire to demonstrate that we “feel the pain” of low-wage workers without acknowledging the ways in which policies like high wage floors might inflict pain on the young and the less-skilled.



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