Monday, August 8, 2016

Higher Local Minimum Wages: Early Results from Seattle

In June 2014, the city of Seattle passed a law raising the minimum wage for many employers in the city. The law went into effect on April 1, 2015, with an $11/hour minimum wage taking effect for many employers at that time, a $13/hour minimum wage scheduled to start in January 2016, and then ongoing rises up to $18/hour in years to come. A group called the  Seattle Minimum Wage Study Team, based at the University of Washington, is planning to study the effects of this rise in the minimum wage over time. The team investigators are Jacob Vigdor, Mark C. Long, Jennifer Romich, Scott W. Allard, Heather D. Hill, Jennifer Otten, Robert Plotnick, Scott Bailey, and Anneliese Vance-Sherman. It has now published a study on the first nine months of Seattle's higher minimum wage, in Report on the Impact of Seattle's Minimum Wage Ordinance on Wages, Workers, Jobs, and Establishments through 2015.

Perhaps the main difficulty in all minimum wage studies is the "compared to what?" question. If a minimum wage law is phased in over time and accompanied by higher wages, would a substantial portion of that rise in wages have happened anyway? If a minimum wage law is phased in over time and accompanied by fewer low-wage jobs, would a substantial portion of that decline in low-wage jobs have happened anyway (perhaps because of automation or other factors)?

One way to tackle the "compared to what?" question is to use comparison groups. Specifically, the Seattle study team looks at patterns of wages and jobs in Seattle before and after the rise in the minimum wage, and compares it to patterns to four other areas. Seattle is in King County, so one comparison is to King County outside Seattle.  A second comparison is to counties that surround King County, namely Snohomish, Kitsap, and Pierce. A third comparison is to  “synthetic Seattle,” which the researchers define "as a set of regions in the state of Washington that have matched Seattle’s labor market trends in recent years." A fourth comparison is “Synthetic Seattle excluding King County,” to account for potential spillover of the Seattle Minimum Wage Ordinance into labor market of suburban King County

As a starting point, the evidence shows that hourly wages for low-wage workers did rise in Seattle. At they write: "The typical worker earning under $11/hour in Seattle when the City Council voted to raise the minimum wage in June 2014 (“low-wage workers”) earned $11.14 per hour by the end of 2015, an increase from $9.96/hour at the time of passage."

However, the economy in Washington state was doing fairly well in 2015, and wages also rose in the comparison group areas. In describing the higher hourly wages in Seattle, the study team writes: "The minimum wage contributed to this effect, but the strong economy did as well. We estimate that the minimum wage itself is responsible for a $0.73/hour average increase for low-wage workers."

These findings for the wage paid per hour don't take into account possible changes in the number of hours worked. The study finds: " The minimum wage appears to have slightly reduced the employment rate of low-wage workers by about one percentage point. ... Hours worked among low-wage Seattle workers have lagged behind regional trends, by roughly four hours per quarter (nineteen minutes per week), on average. ... Low-wage individuals working in Seattle when the ordinance passed transitioned to jobs outside Seattle at an elevated rate compared to historical patterns. ... For businesses that rely heavily on low-wage labor, our estimates of the impact of the Ordinance ... on hours per employee more consistently indicate a reduction of roughly one hour per week."

Thus, low-wager workers in Seattle were better off as a result of the higher minimum wage if they managed to keep their job or to keep working roughly the same number of hours. But the employment rate of low-wage workers in Seattle declined slightly, as did the hours worked, which would lead to lower total earnings. As the study group notes: "The major conclusion one should draw from this analysis is that the Seattle Minimum Wage Ordinance worked as intended by raising the hourly wage rate of low-wage workers, yet the unintended, negative side effects on hours and employment muted the impact on labor earnings. ... The effects of disemployment appear to be roughly offsetting the gain in hourly wage rates, leaving the earnings for the average low-wage worker unchanged. Of course, we are talking about the average result."

Looking at the comparison groups, the study team doesn't find any effect of the first nine months of Seattle's higher minimum wage on business openings or closings: "We do not find compelling evidence that the minimum wage has caused significant increases in business failure rates. Moreover, if there has been any increase in business closings caused by the Minimum Wage Ordinance, it has been more than offset by an increase in business openings."

As the authors are at some pains to point out, it would be unwise to draw general conclusions about the minimum wage from a single study. The Seattle economy has specific characteristics during the period under study, which other urban areas may not share. The comparison economies are all in Washington state, and all have their own  specific characteristics, too. Looking at the effects of a city-level law and extrapolating to a state-level law or a national-level law can be problematic for a lot of reasons: for example, it's a lot easier for some employers paying minimum wage to expand in Seattle to shift operations to just outside the city border than it would be for them to shift outside the state border or the national border.

Moreover, some responses to a minimum wage might take time. For example, perhaps employers over time will find that hiring as many or more workers at the the higher minimum wage makes more economic sense than they had previously expected, perhaps because the higher wages bring less employee turnover or higher efficiency. Alternatively, perhaps employers over time will find more ways to substitute away from lower-wage workers in Seattle, using automation or having work done in other locations, and job losses traceable to the higher minimum wage will rise.

I'm willing to let the evidence tell me the story, and on many economic issues, it takes time for the evidence to accumulate. As more cities raise minimum wage, the picture will clarify. But the early evidence from Seattle is that a higher minimum wage at the city level doesn't raise total earnings by much, because low-skilled workers end up with fewer hours on the job.