In 2014 the city of Seattle became one of the first cities in the nation to pass $15 minimum wage legislation. The legislation mandated that the raise be phased over several years, with pay reaching $15 an hour everywhere by 2021. As a result, many people in Seattle have seen a raise in the last three years.
Since 2014 dozens more cities, states, and even entire businesses have embraced the $15 minimum wage. As the trend has become more popular, more and more studies are also being conducted to examine the effects of the wage raise on the city of Seattle. A lot of people are looking at Seattle and thinking about what will happen if the minimum wage is raised in their cities.
But earlier this week the University of Washington released a report that suggested the minimum wage has had a negative effect on employment. Overall the report found that there were less low wage positions in the city.
While the data can tell us what is happening, numbers can’t really tell us why things happen. Wages are not the only causation of net employment. The increase in Seattle wages is due to some combination of the change in the law, mandating a higher minimum wage, and increased demand for workers which has also made employers raise wages.
The short answer is that this study fails to paint an accurate picture of the state of things in Seattle. The long answer is that raising wages is still one of the best things that can be done to boost an economy.
The Study
The Jardim et al. study from University of Washington is saying that the number of low wage jobs has actually decreased as a result of the raise in minimum wage. The data they present appears to show that they’ve had to reduce labor.
But the data that the study uses is deeply flawed. Here is a simple example of how the calculations can be accurate, but still entirely deceptive:
Imagine a firm has four employees who all work 40 hours per week, and are paid (per hour) $12, $18, $19, and $20.
And imagine now that everyone gets a raise of $1 per hour (so after the change, the hourly pay rates are $13, $19, $20 and $21).
Before the change, the low wage workers made an average of $15 and had a total of 80 hours per week of work. The high wage workers made an average of $19.50 and also had a total of 80 hours per week of work.
After the change, the low wage workers make an average of $13 per hour, and have a total of 40 hours per week of work. The high wage workers make an average of $20 and have a total of 120 hours per week of work.
This sounds like a good thing, but it also generates news stories like the ones that have been coming out all week all screaming the same thing: “Number of low wage workers drops by 50%!”
Just looking at the numbers it is hard to tell if the four employees were the same four employees before and after the raise, if new people were hired, or what else played a factor in the change. The only definitive thing we can say is that the low wage jobs went down while high wage jobs went up. There is no exact causation in the data of why.
The number of people employed in Seattle and their wages actually went up, a lot, when the minimum wage went up. Jardim and his colleagues are trying to tell us that the change in the minimum wage law should not get any credit for that increase, and they are implying that there would have been an even greater increase in the absence of the law.
Who Did They Study?
The Jardim study from Washington also leaves out a lot of people. Employees of companies which are located in more than one place (that covers a lot of companies in Seattle, about 40% of the workforce). The study was done based on records of unemployment insurance coverage which employers in the state of Washington (and most states) to sign up for. Employers pay fees for the unemployment insurance based on how many workers they have and the pay level of those workers. Many companies have employees both within and without Seattle. In order to execute their methodology the researchers handled employees of those companies by … leaving them out of the study.
These are people who work in the sharing economy, or as independent contractors, or are self employed. You may like Uber and Lyft and all of the other companies which are counting people who provide labor in exchange for money as independent contractors (instead of as employee) or you may not like them, but the fact is that they exist, and the number of people in such arrangement is growing.
A Business Perspective
I can’t say for sure how things would have been if they had not raised the minimum wage in Seattle, but local business owners should give some thanks to raised wages for sustained and increased profits in the city. Anecdotally, businesses across the city that cater to less affluent people (such as Molly Moon’s Ice Cream), are reporting that their customers seem to have more money than they used to have – and that they are spending that right back in their stores.
This is nothing new. America’s lowest-paid workers have the same needs as the rest of us: food, clothing, and shelter. But because their wages are so low, some of these costs are delayed. When they earn extra money, they tend to immediately inject it back into the economy. As the business owners I know have stated: more money in their pockets means more money in our businesses. And more money for a business means higher profits and a higher ability to hire more workers, or promote current workers. Period.
