Three years ago Seattle voted to raise the city's hourly minimum wage in steps to $15. This increase, which will take full effect for large employers in 2018 and for small employers in 2021, would leave the city’s minimum at more than twice the federal minimum wage, one of the highest in America.
A new study out today (June 26) from the National Bureau of Economic Research by six University of Washington professors shows that when the hourly minimum wage rose to $13 in 2016, the second step in the increase, the number of hours worked in low-wage jobs declined by 9 percent. Raising the pay floor has led to net losses in payroll expenses and worker incomes for low-wage workers.
Unlike some studies that look only at restaurant workers or at teens, major segments of the low-wage employment, the new NBER study looks at all low-wage workers across all occupations. The University of Washington team—Ekaterina Jardim, Mark Long, Robert Plotnick, Emma van Irnwegen, Jacob Vigdor, and Hilary Wething—analyzed data on individual workers’ hours and earnings records from Washington’s Employment Security Department.
These earnings records, which are used by states to calculate the amount of unemployment insurance owed to laid-off workers, provide a treasure trove of information. Since they are administrative data reported by firms and are checked, they do not rely on employers’ or workers’ recollection.
Washington State is one of four states to collect hours of work as well as the amount of earnings. That is why this data set provides a way to measure total hours worked, and not just employed workers. This is important because an increase in the minimum wage could result in the same number of people employed, but for fewer hours.
This is precisely what happened in Seattle. When hourly wages rose from $11 to $13 in 2016, hours of work and earnings for low-wage workers were reduced by 9 percent for the first three calendar quarters, resulting in 3.5 million fewer hours worked for each calendar quarter. The number of jobs declined by 7 percent, with the result that 5,000 jobs were lost.
It is noteworthy that the 2015 increase, from $9.47 to $11, did not produce as large an effect. This could be because Seattle had one of the highest hourly median wages in the nation before the wage increase, according to the Labor Department. As a result, the negative effects of an $11 minimum wage were not as bad as they would have been elsewhere.
Even though hours and earnings of low-skill workers declined, the team found that earnings of experienced workers held steady or increased, which suggests that employers switched from low-skill workers who required training to more-skilled workers who did not. This is a logical response to an increase in the minimum wage.
This is what I forecast in 2014, writing about the probable effects of the increase in the Seattle minimum wage in a debate the New York Times. I wrote, “But low-skill jobs remaining in the city will see increased competition, with medium-skilled, experienced workers winning out over low-skilled, mainly young workers trying to reach the first rung of the career ladder.”
On the other side of the debate, President Clinton’s Labor Secretary Robert Reich wrote, “The gains from a higher minimum wage extend beyond those who receive it. More money in the pockets of low-wage workers means more sales, especially in the locales they live in – which in turn creates faster growth and more jobs.”
The evidence shows that in Seattle, low-wage workers got less money in their pockets, rather than more. Experienced workers got more money.
University of Massachusetts professor Arindrajit Dube, another debator, stated, “The good news is that the somewhat long ramp-up period in Seattle will provide us with an occasion to learn from this experiment and offer opportunities for course corrections…if it turns out businesses can absorb this increase without a substantial reduction in less-skilled employment, then it's the rest of the country – and dare I say the economics profession – that might need a rethink.”
The economics profession clearly does not need a rethink. It is time for states and localities to reverse course on increases in the minimum wage. As economic theory predicted, governments cannot force employers to pay low-skill workers a high-skill wage.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning Ebrief.