Effects of the $15 Minimum Wage in Seattle

January 30, 2018

In 2015, Seattle legislators signed a bill to gradually increase the city’s minimum wage to $15 an hour over several years. Businesses with fewer than 500 employees will still have until January of 2024 to deal with the full ramifications of the act. However, businesses that do not provide medical benefits and employ over 500 people were forced to pay their workers $15 dollars an hour starting this past January [1]. Since then, two major studies have been published on the effects of the act, one concluding that it has had a positive effect on economic activity and employment and the other stating that it has made the labor market far too rigid.

(Image: Seattle's Minimum Wage. Source: The Office of Mayor Edward B. Murray)

(Image: Seattle's Minimum Wage. Source: The Office of Mayor Edward B. Murray)

The main goal of the act was to increase the amount of disposable income available to low skilled workers, specifically to increase access to certain goods such as health care, food, or education. That said, critics generally on the conservative side argue that the implementation of such a policy would fail to yield these results as an increase in the minimum wage traditionally increases a firm’s costs of production, leading to greater unemployment [2]. Taking the Seattle case study into account, and given that this is the most aggressive minimum wage policy the country has seen to date, conservatives might expect employment opportunities for low skilled workers to decrease and mean consumer spending to remain unchanged, if not worsen slightly [3]. Conservative economists believe the added income spent by those who are able to keep their jobs may be offset by income forgone by those who were fired. In contrast, the more liberal viewpoint would argue that an increase in the minimum wage and the resulting increase in disposable income available to low skilled workers should offset the added employment costs incurred by businesses, as added disposable income increases spending [4]. In the context of the Seattle case study, liberals might expect to see little or no change in unemployment, an increase in average consumer spending, and an increase in business sales.

The first Seattle study was conducted at the University of California Berkeley by Michael Reich, Sylvia Allegretto, and Anna Godoey and sheds favorable light on the minimum wage increase. This study evaluates the effect of the increased minimum wage between 2009 and 2016, specifically examines the restaurant industry to draw its conclusions, and only evaluates the wage increase up to thirteen dollars given that data collection ended in 2016. Ultimately, the study finds that for every 10% increase in Seattle’s minimum wage, restaurant industry wages for low-wage employees (upon whom the minimum wage has the greatest effect) increased by 1% and wages specifically within the limited-service (fast food) restaurant industry increased by 2.3%. Fast food employees enjoyed greater wage increases with an increase of 16.7% compared to the full-service industry of 4.2% likely because restaurants in the full-service industry were able to use the tip credit component of the minimum wage law to their advantage so they didn’t have to increase wages to as large a degree. This study also found no distinguishable decrease in employment in Seattle due to the increased minimum wage; the study concluded that the increased minimum wage was essentially a success [5].

(Image: Wage outcomes, Seattle and Synthetic Seattle. Source: University of California, Berkeley)

(Image: Wage outcomes, Seattle and Synthetic Seattle. Source: University of California, Berkeley)

The Seattle Minimum Wage Study Team at the University of Washington also performed a study to evaluate the impact of the wage increase, but produced a much more negative analysis of its effectiveness. Rather than using restaurant data, this study relied upon unemployment insurance (UI) data from the Washington Employment Security Department (ESD) [6]. The study defined low-wage workers as those who made less than eleven dollars during the second quarter of 2014, and found that wages indeed increased by $1.18 per hour for these workers; specifically, it found that the higher minimum wage accounted for $0.73 of the $1.18 increase. However, the likelihood that these low-wage workers remained employed decreased by 1.1% and the average number of hours each employee worked decreased by between 7.5 and 9.9 hours each quarter during the 4th quarter of 2015 [7]. The University of Washington’s study illustrates a significant negative impact of an increase in minimum wage: during the period of increasing minimum wage, including the second wage increase to $13 an hour, the number of hours worked by low-wage workers fell by 3.5 million per quarter. The researchers at the University of Washington found that there were thousands of jobs lost and a reduction in hours worked by those who retained their jobs. The total payroll accruing to low-wage workers fell by about $120 million per year, with workers losing $125 per month on average, suggesting that businesses are more sensitive to wage rate hikes than expected. Although this evidence seems to indicate that the minimum wage increase has not been as successful as the Berkeley study concluded, other experts have identified several possible reasons for this incongruence.

The decreased hours for low-wage workers could be the result of other factors. The Economic Policy Institute argues that the decrease in hours for low-wage laborers illuminated by this study is simply due to an increase in higher paying jobs, compounding the effect of the increased minimum wage [8]. Furthermore, the data used in this study does not include any workers employed by franchises (businesses with more than one location), which leaves out 40% of the labor market [9].

However, minimum-wage advocates argue that the negative findings by University of Washington are disproportionately large and likely inaccurate due to errors in research. Ben Zipperer and John Schmitt of the Economic Policy Institute pointed out objections to the methodology and data used in the University of Washington paper, claiming that the study is biased in the direction of finding job losses, even where there may have been no job loss [10]. The University of Washington study excludes workers in businesses that have more than one location, such as big box retailers and chain restaurants, whereas almost 40 percent of workers in Washington state work at multi-state businesses. And, the researchers at the University of Washington are unable to capture earnings in the informal sector, where there may be missing job data [11]. The biggest contention lies in the fact that the University of Washington study uses data not available publicly. This might be one reason why research the University of Washington report departs from other research observations. Ben Zipperer and John Schmitt also noted that Seattle’s increase in wage “is within the range of increases that other research has found to have little to no effect on employment”, although Seattle’s minimum wage increase is the largest ever studied [12].

The Berkeley study is also imperfect. Research by David Neumark and William Wascher has shown that a minimum wage’s effects may vary significantly across industries, making it difficult to extrapolate from industry-specific estimates, whereas the Berkeley study only sampled the food-service industry, and is not a representative sample of the whole workforce [13]. In fact, John Schmitt of the Center for Economic Policy and Research has confirmed that the food industry tends to have a predictable relationship to the workforce [14]. There also exists the caveat that food service industries are very sensitive to an increase in the minimum wage. This is because the food industry hires a large proportion of low-wage workers with the highest ratio of payroll to total operating expenses. The Berkeley study also constructs its synthetic control from localities around the United States. This broad reach provides a greater range of possibilities, but might not be able to simulate Seattle’s economic environment. All of these results should also take into consideration the 3.3% unemployment rate in Seattle – the lowest in the nation [15].

Clearly, it is challenging to create a sound minimum wage policy. Although the Berkeley study highlights the positive impact of Seattle’s minimum wage, it still reports that the wages in the restaurant industry rose only a small fraction (1%) even as Seattle’s official minimum wage rose by 10% [16]. The Washington University study emphasizes the double-edged sword component of increased minimum wages: a decrease in employment hours [17].

(Image: Total wage bill impact of recent minimum-wage increases. Source: Center for Economic Policy Research)

(Image: Total wage bill impact of recent minimum-wage increases. Source: Center for Economic Policy Research)

This trend of increasing minimum wage is not unique to Seattle, nor even to Washington state. Many cities throughout the US are raising their minimum wages by varying degrees; examples include larger cities like Los Angeles, which is set to have a minimum wage of $15 by 2020, and smaller cities like Flagstaff, Arizona, which is set to have a minimum wage of $15 by 2021 [18]. Raising the minimum wage in individual cities rather than entire states has several benefits: namely, each city can set a minimum wage directly proportional to living costs in that area (which are usually higher than in rural areas), and the state legislature does not have to pass the minimum wage, speeding the implementation process [19]. Currently, because Seattle is the first city in America to implement such a high minimum wage, Seattle to an extent may also act as a guinea pig city for the rest of the country to evaluate the efficacy of raising minimum wage. However, generalizing the effects of Seattle’s wage increases is difficult, given that it has experienced a very active labor market in recent years, possibly confounding studies of the effects [20]. Furthermore, given that Seattle’s minimum wage only recently reached its target point, more data regarding the effects are still to come. As more and more cities implement similar policies and as more studies are done to evaluate Seattle’s labor market over time, we should gain a clearer picture of the effectiveness of minimum wage increases and the factors that contribute to the success or failure of such wage policies.

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