A Groundbreaking Minimum-Wage Study

by Robert VerBruggen

Basic economics holds that when you mandate a higher price for something, you get less of it. But reality is a bit messier than that, and there’s a robust debate over the effect that the minimum wage has on employment. Few deny that, say, a $30 wage floor would cause enormous job losses, but it can be hard to detect much of an impact from smaller increases.

A working paper released today improves on prior research and suggests that there are indeed substantial employment losses as you approach the Left’s target of $15 an hour — and that those losses far outweigh the higher wages paid to the workers who stay employed.

Economists at the University of Washington were given access to administrative data that include the earnings and hours of individual workers in Washington State, allowing them to precisely identify workers by the wages they made. (Previous studies usually relied on more roundabout methods, like looking at stereotypical low-wage workers such as teens or those in the retail or restaurant industries.) They were able to see what happened to low-wage workers — defined as those making up to $19 an hour — as Seattle’s minimum wage grew from $9.47 to $11 in 2015 and then to $13 the next year.

Generally, what you expect to see from the minimum wage is that (1) wages increase, because legally they have to; and (2) workers put in fewer hours, some losing their jobs entirely, because it has become more expensive to employ them. The relationship between these two effects — the “elasticity” — tells you whether more or less money is flowing to low-wage workers in general.

An elasticity of -1, for example, means that when wages go up 1 percent, hours fall 1 percent and this group of workers breaks even money-wise. Even that may not be a good tradeoff, of course, because losing money can hurt more than gaining money helps. If two people make the same amount of money, you will do more harm than good if you double one of their salaries but put the other out of work and break up his marriage.

The new study says that Seattle’s first minimum-wage increase, to $11, created an elasticity of right around -1: break-even at best. The next one, to $13, had an elasticity of -3, with hours falling 9 percent while wages grew just 3 percent. This “lowered low-wage employees’ earnings by an average of $125 per month in 2016.” A policy with this latter effect is obviously indefensible.

But there are a couple of caveats here. One, Seattle started from a high minimum wage; the federal minimum is just $7.25. Since the overall effect gets worse as the mandated wage gets higher, it’s likely that more modest increases (say, to $8 or $9) would have elasticities closer to 0 and would thus be easier to justify on cost-benefit grounds.

Second, there was a big limitation to the authors’ data. Many employers have multiple sites, some inside Seattle and some outside, and they have the option of reporting data for all their operations at once, instead of separately for each location. Employers that did this are excluded from the analysis, which ends up including 89 percent of employers but only 62 percent of employees.

However, survey data suggest that bigger employers were more likely to reduce employment in response to the wage hike. (Single-site employers, after all, by definition don’t have the option of moving jobs to a different site; their only choices are to pay workers more or let them go.) Of course, that might turn out differently if a minimum-wage hike were enacted on the state or federal level instead of just the local one.

Third, and finally, the authors “estimate an effect of zero when analyzing employment in the restaurant industry at all wage levels, comparable to many prior studies.” This suggests that restaurants, at least, replaced low-wage employees with those earning more than $19 an hour. This evokes the old cliché about sawing off the bottom of the income ladder; when low-skilled workers are too expensive to hire, they lose opportunities to higher-skilled employees.

This isn’t the end of the discussion. But it’s a rigorous and groundbreaking study that strongly suggests a $15 minimum wage, which Seattle is still phasing in, would be a really, really bad idea.

 

The Corner

The one and only.