What Does the Seattle Experience Teach Us About Minimum Wages?

The Issue:

The federal minimum wage is $7.25, well below historical levels in real terms. Many large cities, including Los Angeles, San Francisco, Chicago, and Miami Beach, and seven states have implemented higher minimum wages. Both California and New York State, along with several cities, are scheduled to raise their minimum wages to $15 per hour (in nominal terms) in coming years. A growing movement advocates raising the federal minimum wage to this level as well.

Opponents of minimum wage increases have long argued that high minimum wages will reduce employment for less skilled workers. Studies of past increases in state and federal minimum wages have not found clear evidence of substantial negative employment effects. However, the increases scheduled in many locations in coming years will lift the minimum wage to levels that are higher in inflation-adjusted terms than those examined in most existing research. Wage floors at these levels may have larger negative employment effects.

A new study of recent Seattle minimum wage increases, to as high as $13 per hour for some workers, finds much larger employment losses than does the previous literature. The authors conclude that this increase substantially reduced average incomes of low-wage workers in Seattle. Some have taken this as evidence supporting the view that higher minimum wages have much more negative employment effects than are seen for lower wage floors, and thus that the new wave of increases is ill-advised.

It is an important and unresolved question whether minimum wages at the levels that will be reached in many cities and states in coming years will lead to meaningful reductions in employment.

The Facts:

 

• The new study, by a team of scholars at the University of Washington, finds that hours worked by low-wage workers in Seattle fell by 9 percent following January 2016, when the Seattle minimum wage rose to $13 per hour for some workers, with reductions in both the number of jobs and average hours per worker. The study defines low-wage jobs as all those paying less than $19 per hour. The study also finds that the increased minimum lifted average wages in these jobs by only 3 percent, implying that the average income of individuals who would have had low-wage jobs in the absence of the increase fell by $125 per month.
• The federal minimum wage has never exceeded $11.03 in inflation-adjusted dollars, and none of the state increases included in most past research reached this level. Thus, the Seattle $13 minimum wage is high relative to historical experience. Another common way to measure the magnitude of a minimum wage is as the ratio of the minimum wage to the average or median wage among all workers. The Seattle $13 floor is high by these measures as well.
• While Seattle's $13 minimum wage is high by historical experience, in practice the raise received by many workers was below this rate. The Seattle law sets different minimum wages for different groups of workers, and for many workers the floor was well below $13 in 2016. For workers at firms with more than 500 workers across all locations, the minimum wage rose from $11 to $13 on January 1, 2016, or to $12.50 for those that contribute toward health benefits. The minimum wage was lower for workers at smaller firms. For workers who did not receive health benefits or tip income, the minimum rose from $11 to $12; for those who did receive benefits or tips, the increase was from $10 to $10.50. These increases are much more within the range of historical experience.
• The Seattle study excluded a large share of workers who were covered by the $13 and $12.50 minimum wages. Due to data limitations, the authors of the Seattle study excluded employers with multiple locations such as retail chains, which tend to be high employers of low-wage workers. Among the firms that remained in the sample, the average employment was only 14, as compared with 68 among firms that were excluded from analysis. Although the study does not report the share of included workers who would have been covered by the large-firm minimum wage, it was likely quite small. Thus, the study is best interpreted as pertaining to the lower minimum wages applying to workers at smaller firms, $10.50 or $12.
• Because wages and employment are constantly changing, determining which changes in Seattle can be attributed to the minimum wage hike requires finding a comparable location that is subject to all of the same market forces, but did not institute a minimum wage increase. The study identifies the effect of the Seattle policy change by comparing low-wage employment at single-location firms in Seattle to other areas in Washington state that had similar trends in low-wage employment to Seattle prior to 2015. These areas are quite different from Seattle, which is nearly triple the size of the next largest city in the state. The Seattle economy was booming during the period covered by the study, which might have been expected to reduce low-wage employment as employers offer higher wages to attract scarce workers. The study relies on an untestable assumption that low-wage employment would have evolved similarly in Seattle as in the comparison areas had the minimum wage not increased.
• Trends in high-wage employment in Seattle diverged from those in the comparison areas in the period covered by the study. The number of jobs paying more than $19 per hour grew faster in Seattle than in the comparison areas in 2015 and 2016. This is inconsistent with the hypothesis that the economies were evolving similarly but for the minimum wage increase. It is more consistent with the view that the Seattle boom was increasing relative wages there. If some Seattle firms found it necessary to raise their wages from just below to just above $19 due to shortages of workers, this could account for the study’s results indicating declines in sub-$19 employment, without any negative employment effects of the minimum wage.
• There is some reason to think that large firms are better able to accommodate high wages than small firms. Overall, large firms tend to pay higher wages. If multi-site firms expanded and single-site firms shrunk, due either to the strong economy or to the minimum wage increase, this could generate the study’s results for single-site firms even with no net change in low-wage employment.
• An alternative study that used national data to compare Seattle to areas outside Washington state found no evidence of negative employment effects of the Seattle increase. It is more likely that plausible comparison areas can be found in national data. However, this study could examine only overall employment in food services, which have high concentrations of minimum wage workers; it could not distinguish high- from low-wage employment in this sector.