High Minimum Wage Has Winners and Losers

(Bloomberg) - It has now been a few days since a research team alerted the rest of us that Seattle’s $13 minimum wage is hurting low-wage workers more than it is helping them. The tsunami of instant reaction seems to have passed, so let’s take a broader view. What can we learn?

First, some background. Declaring that they were answering “President Obama’s call and the moral call to address the plight of low-wage workers,” the Seattle city council voted in June 2014 to increase the city’s minimum wage to $15 per hour over a period of a few years. Seattle’s minimum wage hit $13 last year (on its way to $15), and the consequences aren’t pretty.

A team of researchers at the University of Washington, led by economist Jacob Vigdor, found that the number of low-wage jobs in Seattle declined considerably as a consequence of the $13 per hour mandate. They also found that the number of hours worked by low-wage labor declined by 9 percent, while wages increased by only 3 percent. Since hours went down more than wages went up, the net result is that the amount of money earned by low-wage workers actually fell.

The reactions to the Vigdor study have not been edifying. Both the pro- and anti-minimum wage crowds need to stop and take a breath.

Minimum wage advocates unhappy with the study’s conclusion especially have not covered themselves with glory. One group of economists rushed out a study of their own — at the request of the Seattle mayor’s office, which was apparently concerned about the results of the Vigdor study — that found results more favorable to the high minimum wage. One member of that group declared that the Vigdor study is “not credible.”

That’s much too strong a criticism, and simply not a reasonable way for an economist to characterize the Vigdor study.

The Vigdor study — commissioned by the City of Seattle — employs state-of-the-art economic methodology. It applies that methodology to rich data that allows for a deeper investigation of the effects of increasing the minimum wage than previous data had allowed. It’s a major contribution to the academic literature and to economists’ understanding of the effects of the minimum wage.

That doesn’t make it the final word on the subject, of course — a point made by the study itself. The data it used make it difficult in some instances to determine whether a particular job is in the city of Seattle or elsewhere in Washington state, and the study attempts to deal with this challenge by limiting its scope to workers at single-location firms. The data also don’t include contractors.

To determine the effects of Seattle’s minimum wage increase, the study compares hours and wages in Seattle to those in neighboring counties, before and after the Seattle increase. This is reasonable, but one could also reasonably be concerned that those neighboring counties are not the best comparison group. To address this possibility, the study uses more complex statistical methods. There again, it’s reasonable to question those methods — but not the conclusion that the Vigdor study materially advances our understanding of the effects of the minimum wage. It’s hard for me to understand how any economist could conclude otherwise.

At the same time, the Vigdor study is just one study. Should it increase our confidence that minimum wage increases can hurt low-wage workers? Of course. Does it prove that point for all time in all places? Of course not.

The Vigdor study covers only one city. The economics of city-specific minimum wage increases are probably somewhat different from that of state or federal increases. It’s also hard to be sure that what happened when Seattle increased its wage to $13 per hour in the context of getting to $15 per hour can be generalized to what might happen if, say, Kansas City increased its minimum wage to a different amount in a different context over different years.

So where does this leave the debate over minimum wages? Right where it was before: confused.

Recall the 2014 analysis by the nonpartisan Congressional Budget Office of the effects of increasing the federal minimum wage to $10.10 per hour from $7.25, where it has been since 2009. The CBO found that the boost would increase the earnings of millions of workers by a total of $31 billion. It also found that the increase would reduce employment by hundreds of thousands of jobs, and that less than one dollar in every five of that $31 billion would go to households living in poverty.

In short, there are trade-offs. And so when thinking about whether minimum wage increases are good or bad, you have to think clearly about the social goal you are trying to achieve. If your goal is to help reduce income inequality and to increase the earnings of some middle-class households, then the minimum wage is not a crazy policy.

But if your goal is to help the least skilled, least experienced, most vulnerable members of society to get their feet on the first rung of the employment ladder and to start climbing, then the minimum wage is counterproductive. Its costs are concentrated among those vulnerable workers. It is an obstacle in their paths. It is bad policy.

No economics paper can tell us the right social goal. But a good one can help us understand the effects of a policy. The Vigdor study does that, and does it well.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.


Strain is a Bloomberg View columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute.