Recently a few friends of mine have linked to this article, which summarizes a new University of Washington study about the Seattle minimum wage increase. The article headline reads, “New UW Report Finds Seattle’s Minimum Wage Is Great for Workers and Businesses.” My friends like to add snarky comments feigning surprise, implying that of course the minimum wage is great for workers and businesses.
1. The “of course” intuition runs in the opposite direction.
Demand curves almost always slope downward so our naive intuition would be that business will shed low-wage workers because they cost more under a minimum wage regime. It was only after David Card and Alan Krueger’s 1993 paper (and the subsequent papers that utilized a similar difference-in-difference strategy*) that economists had hard evidence that small minimum wage increases might not reduce employment.
*Difference-in-Difference is an easily understood technique in which you compare the starting and ending points of two different rates to see how they performed relative to one anther. My mile time was 11 minutes last year, but now it’s 10 minutes. Your mile time was 11:30, but now it’s 9 minutes. I improved by one minute, but you improved by two minutes and thirty seconds. One minute and thirty seconds is the difference between our individually differenced before and after times, which is where the technique gets its name (difference is just another word for subtraction).
Suppose we’re genetically similar, say, for example, that we’re twins. We now know that the difference in our mile time improvements over the past year was due to our different training regimens and not genetics and — setting aide the fact that we only have a sample size of two — we now have proof that your workout regimen is better (at least for people that share similar genes).
The attractive thing about difference-in-difference experiments is that they don’t use any fancy math: the results are both easy to calculate and easy to understand. If you can find two people — or groups, or cities, or things — that are similar and can track their performance over time all you have to do at the end is subtract a couple of times and you have a statistically valid result.
2. The headline and content of the article sorely misrepresents the results of the study.
The article’s author cites only the Seattle increase portion of the difference-in-difference approach. It’s the equivalent of me citing my increased mile time and telling you how great my workout plan is without telling you that my twin did much better with a totally different workout plan. Most of the increase in employment and business success was due to the recent strength of the Seattle economy. An acquaintance that recently started at Amazon told me they just had their largest orientation ever, 600 new employees.
Ultimately the authors conclude with this finding:
The major conclusion one should draw from this analysis is that the Seattle Minimum Wage Ordinance worked as intended by raising the hourly wage rate of low-wage workers, yet the unintended, negative side effects on hours and employment muted the impact on labor earnings.
The authors don’t find that the minimum wage increase was “great” for businesses, but instead mostly a wash. There was a small, 0.7 percentage point, increase in the rate of business closure. The authors also note that:
A higher minimum wage changes the type of business that can succeed profitably in Seattle, and we should thus expect some extra churning. Our results are consistent with those of Aaronson, French, and Sorkin (2016), who conclude that minimum wage laws prompt increases in both entries and exits (particularly in chains), with closures coming from more labor intensive industries and establishments, and more openings occurring in more capital intensive industries.
I think this structural realignment is foreboding for the future of Seattle’s low-wage workers. The minimum wage currently stands at “only” $11 and we’re a year into the experiment. What happens in seven years and an additional $7 in hourly pay? There could be serious negative structural adjustments to low-wage industries.
So what about the workers themselves? The best estimate is that the minimum wage decreased low-wage employment by 1 percentage point. Far from “great.” The workers that were still employed did experience modest gains in material well-being:
Seattle’s low-wage workers who kept working were modestly better off as a result of the Minimum Wage Ordinance, having $13 more per week in earnings and working 15 minutes less per week.
One has to ask themselves if the minimum wage was so great why didn’t low-wage workers flood into the Seattle area? On the contrary the authors find the following:
…we conclude that the Seattle Minimum Wage Ordinance reduced the probability of low-wage workers continuing to work in the Seattle (rather than elsewhere in the state) by 2.8 percentage points.
So bad was the misrepresentation of this article, which my friends footnote with duh-obviously-the-minimum-wage-is-great style comments, that Jake Vigdor, the lead author of the study, himself responded in the comments section:
As director of the Seattle Minimum Wage Study, it is my sad duty to report that this article grossly mischaracterizes the tenor of our report. I encourage readers to refer directly to that report:https://seattle.legistar.com/View.ashx?M=F&ID=4579065&GUID=39743A75-1D9F-4C32-B793-2F699D51B0F7
3. An argument against the minimum wage is not an argument to condemn the poor.
The minimum wage is only one poverty reduction strategy. Many economists are in favor of small increases in the minimum wage because there is a lot of evidence that suggests the impact on employment is small or non-existent (or even slightly positive). But many economists are quite nervous or ambivalent about $15 minimum wage increases. As this Forbes headline notes, “Even Alan Krueger Thinks That A $15 An Hour Minimum Wage Is Too High.” And Alan Krueger helped pioneer the argument in favor of the minimum wage!
4. Shouldn’t we read things before we comment about them?
This echos my thoughts in an early post about things I do and don’t hear in Seattle.