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Seattle’s Minimum Wage Hike May Have Gone Too Far

As cities across the country pushed their minimum wages to untested heights in recent years, some economists began to ask: How high is too high?

Seattle, with its highest-in-the-country minimum wage,1 may have hit that limit.

In January 2016, Seattle’s minimum wage jumped from $11 an hour to $13 for large employers, the second big increase in less than a year. New research released Monday by a team of economists at the University of Washington suggests the wage hike may have come at a significant cost: The increase led to steep declines in employment for low-wage workers, and a drop in hours for those who kept their jobs. Crucially, the negative impact of lost jobs and hours more than offset the benefits of higher wages — on average, low-wage workers earned $125 per month less because of the higher wage, a small but significant decline.

“The goal of this policy was to deliver higher incomes to people who were struggling to make ends meet in the city,” said Jacob Vigdor, a University of Washington economist who was one of the study’s authors. “You’ve got to watch out because at some point you run the risk of harming the people you set out to help.”

The paper’s findings are preliminary and have not yet been subjected to peer review. And the authors stressed that even if their results hold up, their research leaves important questions unanswered, particularly about how the minimum wage has affected individual workers and businesses. The paper does not, for example, address whether displaced workers might have found jobs in other cities or with companies such as Uber that are not included in their data.

Still, despite such caveats, the new research is likely to have big political implications at a time when the minimum wage has returned to the center of the economic policy debate. In recent years, cities and states across the country have passed laws and ordinances that will push their minimum wages as high as $15 over the next several years. During last year’s presidential campaign, Hillary Clinton called for the federal minimum wage to be raised to $12, and she faced pressure from activists to propose $15 instead. (The federal minimum wage is now $7.25 an hour.) Recently, however, the minimum-wage movement has faced backlash from conservatives, with legislatures in some states moving to block cities from increasing their local minimums.

Many economists, meanwhile, have acknowledged substantial uncertainty over the likely effects of the recent wage hikes. Most — though by no means allpast research has found that modest increases to the minimum wage have little impact on employment, and that if employers do eliminate jobs or cut back hours, those losses are dwarfed by the income gains enjoyed by the majority of workers who keep their jobs. But those studies were mostly based on minimum wages that were much lower than the ones beginning to take effect now. Even some liberal economists have expressed concern, often privately, that employers might respond differently to a minimum wage of $12 or $15, which would affect a far broader swath of workers than the part-time fast-food and retail employees who typically dominate the ranks of minimum-wage earners. Other economists said there simply wasn’t enough evidence to predict the impact of minimum wages that high. The new laws in Seattle and other cities, then, could provide an ideal testing ground.

“The literature shows that moderate minimum wage increases seem to consistently have their intended effects, [but] you have to admit that the increases that we’re now contemplating go beyond moderate,” said Jared Bernstein, an economist at the liberal Center on Budget and Policy Priorities who was not involved in the Seattle research. “That doesn’t mean, however, that you know what the outcome is going to be. You have to test it, you have to scrutinize it, which is why Seattle is a great test case.”

Seattle’s minimum-wage ordinance was one of the earliest and most aggressive of the recent wave. In 2014, the city passed a law raising the city’s minimum wage — already among the nation’s highest, at more than $9 an hour — to $15 an hour over several years.2 Economists immediately saw the law as an opportunity to study the effects of an unusually high minimum wage, and the city of Seattle agreed to help fund a team of researchers to look into the policy’s impact.

The group’s first major report, released last year, looked at the first big increase under the law, in April 2015, in which the minimum wage went from $9.47 to $11 for large employers. The report found relatively little effect, for good or ill: The policy led to some lost jobs and hours, the report concluded, but those were more or less offset by the increased income enjoyed by workers. For workers who kept their jobs, the higher wage was a clear benefit; for low-wage workers as a whole, the impact was minimal. One reason for the muted impact: In high-cost Seattle, not many workers earned less than $11 an hour even before the law took effect.

Monday’s report looks at the impact of the second wage increase under the law: the January 2016 hike to $13 an hour for large employers. This time, the findings look very different: Compared to a counterfactual in which Seattle didn’t raise its minimum wage, the number of hours worked by low-wage workers (those earning less than $19 an hour) fell by 9.4 percent over the first nine months of 2016, and the number of low-wage jobs fell by 6.8 percent. Cumulatively, those add up to the losses of 5,000 jobs and 3.5 million hours of work. The average low-wage employee, they found, saw his or her monthly paycheck shrink by $125, or 6.6 percent.

The study is far from the last word on the impact of Seattle’s law, let alone the $15 minimum wage movement more generally. Indeed, just last week another study used similar methods to reach seemingly the opposite conclusion: A report from the Institute for Research on Labor and Employment at the University of California, Berkeley, found that Seattle’s minimum wage, “raises pay without costing jobs,” as a press release on the study announced.

The Berkeley study, however, looked exclusively at the restaurant industry. That has been a common practice in minimum-wage research, because the industry is one of the largest employers of low-wage workers. But the University of Washington study suggests a possible flaw in that approach: That research, too, found essentially no job losses in the restaurant sector as a result of the city’s minimum wage hike. That suggests that studies that focused on the restaurant industry might have missed larger effects in other sectors. (Michael Reich, one of the authors of the Berkeley study, said he was confident in his findings. Bernstein said focusing on restaurants, especially fast food, was a widely accepted approach that was well grounded in economic theory.)

The Washington study has one big advantage over most past research: The authors had access to detailed data on the hours and earnings of nearly all employees in Washington state, allowing them to measure the effects of the minimum wage much more directly than is possible with less complete datasets.3 But the study has its own weaknesses. Because the researchers had data only for Washington state, they had only a limited pool of places they could compare Seattle to — a key step for figuring out the effects of the minimum wage policy. (The Berkeley paper, by contrast, compared Seattle to similar communities across the country.4)

The Washington researchers also had to exclude many multilocation businesses, which means their sample could leave out major low-wage employers such as fast-food chains. Reich, in a letter to Seattle’s mayor responding to the study, called the findings “not credible” in part because they differed so much from those of past research. But Jeffrey Clemens, an economist at the University of California, San Diego who has studied the minimum wage, said it isn’t surprising that Seattle’s minimum wage would have an unusually big impact because it is so much higher than most other minimums.

Even if the Washington study stands up to scrutiny — and it will get lots more scrutiny — it carries important caveats. Vigdor cautioned that the study makes no claims about individual workers: It is possible, for example, that workers who lost their jobs after the wage hike quickly found other jobs outside of Seattle, or that they made up for lost hours by driving for Uber. Neither shift would show up in the researchers’ data.

Some people almost certainly benefited from the higher wage. David Rolf, president of SEIU 775, a union representing home care and nursing home workers in Washington state, said many of his members have seen clear gains since the law took effect.

“It’s no one’s idea of a luxury wage, but caregivers in Seattle can escape poverty if they work full time, and that’s something most caregivers across the country can’t say,” Rolf said.

But Rolf also noted that workers have benefited from the strong overall economy in Seattle, where the 3.2 percent unemployment rate is forcing companies to compete with each other for employees. Economists say that any negative effects of the minimum wage could become more evident when the economy inevitably cools. And Vigdor said that while experienced workers have probably benefited from the higher wage, new entrants to the labor force, including teenagers, have probably lost out.“This is a ‘canary in the coal mine’ moment,” said David Autor, an MIT economist who wasn’t involved in the Seattle research.

Autor noted that high-cost cities such as Seattle are the places that should be in the best position to absorb the impact of a high minimum wage. So if the policy is hurting workers there — and Autor stressed that the Washington report is just one study — that could signal trouble as the recent wage hikes take effect in lower-cost parts of the country.

“Nobody in their right mind would say that raising the minimum wage to $25 an hour would have no effect on employment,” Autor said. “The question is where is the point where it becomes relevant. And apparently in Seattle, it’s around $13.”

Footnotes

  1. Among big cities. A handful of small cities have higher minimums.

  2. The details of the phase-in are complex. For large companies (those with at least 500 employees) that don’t offer health insurance, the minimum wage hit $15 an hour earlier this year. Smaller companies and those that offer health insurance got a longer phase-in period. The law also instituted a “tip credit” that allows companies to pay tipped workers such as waitstaff a lower cash wage.

  3. The most complete national data on workers and their earnings comes from the unemployment insurance system, which gets information directly from employers. But while the unemployment system has data on how much workers earn, it doesn’t track how many hours they work, making it impossible to directly calculate workers’ wages. That has forced most researchers either to guess which workers are likely to be minimum-wage workers (by focusing on the fast-food industry, for example) or to use data from surveys, which cover far fewer workers. Washington state, however, does collect data on hours, meaning the University of Washington researchers were able to study the minimum wage’s effects much more directly.

  4. Both studies used a “synthetic controls” approach, in which a computer algorithm draws on data from other places to construct an alternative version of Seattle in which the wage hike never took place. This is different from the simpler “difference-in-differences” approach in which researchers compare their subject to similar communities elsewhere.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

Kathryn Casteel writes about economics and policy issues for FiveThirtyEight.

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