Seattle’s failed minimum wage experiment
In what seems to be a never-ending debate about the economic effects of the minimum wage, proponents continue to wrongly tout this policy’s ability to actually help average low-wage workers, despite a mountain of evidence showing the opposite. A number of Canadian and U.S. governments have given in to such demands, installing plans to raise their minimum wage to as much as $15 per hour.
The City of Seattle was one of the first jurisdictions to do so, setting a precedent that has encouraged others to follow suit. In Canada, the Alberta government put forth its own plan for a $15 minimum wage by 2018 while similar proposals have been made in other provinces. Opposition parties in both British Columbia and Nova Scotia are pushing for the same, as are activists across the country.
But a new study from researchers at the University of Washington should provide sobering evidence for minimum wage proponents. It shows that Seattle’s minimum wage policy thus far has been a failure in terms of actually increasing the average earnings of low-wage workers.
Again, this is hardly surprising given the volume of existing academic research finding minimum wage hikes negatively affect the employment prospects for low-skilled workers. While the most productive workers may gain from a higher minimum wage, less productive workers (typically young workers first entering the workforce with minimal experience) lose out on jobs and/or hours worked. The University of Washington study concludes the losses offset the gains.
The study looks at data from June 2014 (when Seattle’s minimum wage ordinance was passed) to the end of 2015 (latest available). Seattle’s $15 minimum wage is being implemented in stages with full implementation by 2021. The first increase took place in April 2015, from the statewide rate of $9.47 to a new city-level minimum wage of $11.00. (Seattle’s minimum wage was increased again in January 2016 to $12.00 for employers with 500 or fewer employees and $13.00 for other employers.) So the study only measures the impact for the nine months after the first minimum wage hike.
Superficially, the initial minimum wage hike does not appear to have hurt job prospects in the city. Seattle’s job growth rate tripled the national average from mid-2014 to the end of 2015.
But as the study notes, the job growth figures had little or nothing to do with the minimum wage. During the period under analysis, the city enjoyed steady growth in tech sector employment as well as a construction boom. So looking at the overall job numbers alone tells us nothing about the impact of the minimum wage hike, which would mainly affect low-skilled jobs anyhow.
Instead, the study’s approach is to compare what happened in Seattle with other, similar Washington communities where the minimum wage did not increase. It finds that employment growth in Seattle would have been even stronger had the city not increased the minimum wage. Specifically, the study finds that:
• Seattle’s minimum wage hike led to a 1.2 percentage point decrease in the employment rate of low-wage workers (defined as earning $11.00 an hour or less).
• The number of hours worked by low-wage workers fell due to the minimum wage hike (by an average of 4.1 hours per quarter).
• The likelihood of low-wage workers continuing to work in Seattle dropped by 2.8 percentage points, meaning that more low-wage workers were seeking jobs outside of the city limits.
The study concludes that the negative effects on employment “appear to be roughly offsetting the gain in hourly wage rates, leaving the earning for the average low-wage worker unchanged.”
The findings are for just nine months after the change in the minimum wage. As the authors note, the negative effects are likely to be considerably larger over a longer time period. And the complete effects will occur only after the minimum wage hike to $15 per hour is fully implemented in 2021.
Over time, minimum wage hikes will discourage future job growth and employers will seek ways to reduce the artificially higher labour costs by cutting back on hours, providing less on-the-job training, and switching to more automation.
Despite the evidence, proponents of raising the minimum wage continue to argue that this policy will efficiently and effectively help low-wage workers. The experience in Seattle is yet another example of why they are wrong.