Free market economists have long warned of the negative consequences of raising the minimum wage. They weren’t the only ones to suggest that raising the minimum wage to $15 in Seattle would cause problems. Even those of the other side of the spectrum admitted that such a high price floor on labor would be risky. Seattle went ahead with their plan anyway and it’s gone exactly as the free market economists predicted. A recent study, originally funded by the city of Seattle, found that raising the minimum wage in Seattle has cost both jobs and hours for the lowest paid employees who needed them most. As always, raising the minimum wage hurt the very people it was intended to help.
The study done by the National Bureau of Economic Research was highly detailed thanks to a Washington state law that requires employers track the hours their employees work. That allowed them to compare between different hourly rates and different positions within companies. The researchers compared the labor market in Seattle to the surrounding cities which didn’t raise their minimum wages and found a clear difference.
When the minimum wage was raised from the previous high of $11 up to $13 an hour in January of 2016 there were dramatic drops in the number of hours worked. While some employees were granted an 18% wage increase their gross pay was actually cut as a result of the 9% decrease in hours and reduction in overtime pay.
Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.
While the hourly losses alone are substantial, it’s only the tip of the iceberg compared to jobs that were cut across Seattle. Thousands of positions were eliminated following the second minimum wage increase to $13 an hour because those jobs simply didn’t create the requisite economic benefit required. No business is going to employ someone at a loss.
In addition to the immediate job losses, there are also the long term consequences of the fact that those jobs will not exist for the next generation of workers. It’s the jobs that are never created in the first place that will have the most lasting impact on the job market. Minimum wage positions are the first jobs that people get when they enter the labor market. A high minimum wage forces companies to no longer consider those as entry level positions. As a result, the unskilled aren’t able to acquire those jobs and begin climbing the economic ladder. They’re kept out of the labor market and in poverty.
It’s harder to measure those long term effects, and this study didn’t get into that, but even the short term effects they were able to measure are enough reason to prevent future minimum wage increases. It’s too late for cities like Los Angeles which is set to raise their citywide minimum wage from $10.50 to $12 an hour starting July 1st. Although, once this study enters the mainstream it’s possible that other cities will be able to learn from Seattle and avoid making the same mistake by raising their minimum wage.