In 2014, the City of Seattle passed a three-step minimum wage increase – from $9.32 to $15 per hour. You can find the exact details here. The $15 minimum wage began in 2017 for larger employers who do not provide healthcare benefits – $13.50 for those larger employers who do provide healthcare benefits. Adoption of the $15 rate by small businesses is set for 2021 – with inflation adjustments. Two wage increases have already been fully implemented. The first, from $9.32 to $11, occurred in 2015. A second increase – to $13 – took place in 2016.
And then a funny thing happened. The city, led by Seattle Mayor Ed Murray, decided to commission a study on the wage hikes – fully expecting the results would provide support for their position.
And Mayor Murray was essentially right – regarding the first wage hike to $11. The University of Washington completed a study in July of 2016 that contained the following summary:
We do not find compelling evidence that the minimum wage has caused significant increases in business failure rates. Moreover, if there has been any increase in business closings caused by the Minimum Wage Ordinance, it has been more than offset by an increase in business openings. In sum, Seattle’s experience shows that the City’s low-wage workers did relatively well after the minimum wage increased, but largely because of the strong regional economy.
Emboldened by these results – and unwisely ignoring the “strong regional economy” caveat – Seattle commissioned a second study on the wage hike to $13 that took place in 2016. This time, the study issued by the University of Washington was not so favorable:
This paper, using rich administrative data on employment, earnings and hours in Washington State, re-examines this prediction in the context of Seattle’s minimum wage increases from $9.47 to $11/hour in April 2015 and to $13/hour in January 2016. It reaches a markedly different conclusion: employment losses associated with Seattle’s mandated wage increases are in fact large enough to have resulted in net reductions in payroll expenses – and total employee earnings – in the low-wage job market. The contrast between this conclusion and previous literature can be explained largely if not entirely by data limitations that we are able to circumvent in our analysis. Most importantly, much of the literature examines the impact of minimum wage policies in datasets that do not actually reveal wages, and thus can neither focus precisely on low-wage employment nor examine impacts of policies on wages themselves.
Here’s where things get really interesting. The Mayor was given an early copy of the University of Washington study. He was not pleased.
Mayor Murray then apparently took the preliminary UW report to researchers at UC Berkeley – researchers he knew to be sympathetic to minimum wage laws ∗. The Berkeley researchers – with hindsight of the Washington University analysis – produced a report of their own. The Berkeley researchers even managed to rush their report out one week before the University of Washington finalized and published their report. The Berkeley researchers provided the following summary:
Our results show that wages in food services did increase—indicating the policy achieved its goal— and our estimates of the wage increases are in line with the lion’s share of results in previous credible minimum wage studies. Wages increased much less among full-service restaurants, indicating that employers made use of the tip credit component of the law. Employment in food service, however, was not affected, even among the limited-service restaurants, many of them franchisees, for whom the policy was most binding. These findings extend our knowledge of minimum wage effects to policies as high as $13.
Mayor Murray, armed with the glowing results of the Berkeley report, held a press conference with an infographic showing the wage hike benefits. He even sent out a really cool tweet:
— Ed Murray (@MayorEdMurray) June 26, 2017
The differences in results come from a quirk in the way Seattle gathers its employment data. From the UW study:
This paper examines the impact of a minimum wage increase for employment across all categories of low-wage employees, spanning all industries and worker demographics. We do so by utilizing data collected for purposes of administering unemployment insurance by Washington’s Employment Security Department (ESD). Washington is one of four states that collect quarterly hours data in addition to earnings, enabling the computation of realized hourly wages for the entire workforce. As we have the capacity to replicate earlier studies’ focus on the restaurant industry, we can examine the extent to which use of a proxy variable for low-wage status, rather than actual low-wage jobs, biases effect estimates.
The University of Washington study, by looking at quarterly hourly wage data across all low wage jobs – in addition to earnings – allows for realized hourly wages. The study is able to directly observe hourly wages because of the unique depth of data available in this particular case. Therefore, the UW study is able to focus directly on low-wage employment. And provides a comprehensive examination of the Seattle’s minimum wage.
The Berkeley study, by contrast, looks only at the food service industry – and does not utilize the hourly wage data used in the UW report. From the Berkeley report:
Our main outcomes of interest are average weekly wages (reported quarterly) and employment (reported monthly). We obtain the average weekly wage by dividing total payroll by average employment and then dividing by 13 weeks for a quarterly measure.
Employers who react to the minimum wage increase by reducing employee hours will thus impart a negative effect on our wage measure.
We focus our analysis on the food service/restaurant industry because it is the most intensive employer of the minimum wage workforce. We examine wages both to determine if there is a treatment effect (which assures us we are analyzing an affected industry) and to quantitatively estimate the increase in worker pay.
Keep in mind that Berkeley had full knowledge of the University of Washington report – and specifically rushed their study to preemptively release it. As far as I can tell, the UW researchers had no idea their research was effectively being shopped until the Berkeley report was suddenly published one week before theirs.
The University of Washington report comprises 63 pages. The Berkeley report only 26 pages. Make of that what you will. And compare both reports for yourself.
The UW report contains some interesting conclusions:
Prior studies have attempted to analyze minimum wage effects using data resources that do not permit the direct observation of hourly wages. In those situations, researchers resort to using proxies for low-wage workers by examining particular industries that employ higher concentrations of low-wage labor or by restricting the analysis to teenagers. This paper demonstrates that such strategies likely misstate the true impact of minimum wage policies on opportunities for low-skilled workers. Our finding of zero impact on headcount employment in the restaurant industry echoes many prior studies. Our findings also demonstrate, however, that this estimation strategy [used by the Berkeley report] yields results starkly different from methods based on direct analysis of low-wage employment [used by the UW report].
Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs.
We compute that the average low-wage employee was paid $1,897 per month. The reduction in hours would cost the average employee $179 per month, while the wage increase would recoup only $54 of this loss, leaving a net loss of $125 per month (6.6%), which is sizable for a low-wage worker.
I decided to write about this for two reasons.
First, we have unequivocal proof of something anyone with a modicum of common sense already knows. If you raise the minimum wage, job losses follow. If you raise the minimum wage substantially, substantial losses accrue to lower wage earners.
The effect is analogous to an exponential curve. The impact is lower for smaller wage movements but can increase quickly with larger wage movements.
The benefits provided by the employee become less than the payments made by the employer. Intuitive. Simple to comprehend.
And now proven.
Secondly, we have direct evidence of what a liberal city hall – and its supporters – will do when confronted with a painful but simple truth. They will shamelessly obfuscate and data mine. Seattle City Hall and Mayor Murray engaged in report shopping. Berkeley researchers ignored the superior data sets not normally available to them – precisely because they already knew the outcome if they did utilize the data.
They all knew exactly what they were doing.
One last thing to note. The UW study only looked at the wage increase to $13. Imagine what the next UW study – examining the move to $15 – will show.
If you doubt the earlier assertion that researchers at Berkeley are sympathetic to minimum wage laws, give their report a quick glance. Berkeley’s position is overtly supportive – almost giddy.
∗ For a headshaking explanation of the sequence of events involving the Mayor and his City Hall, see These People are Shameless by Tim Worstall in Forbes. He also notes the sympathetic minimum wage position held by the Berkeley researchers.
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