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Research & Commentary: Study of Seattle Minimum-Wage Hikes Find Negative Effect on Total Payroll

July 27, 2017

In this Research & Commentary, Matthew Glans examines a recent study which found Seattle's minimum wage increase had a negative impact on the city’s total payroll.

Minimum-wage laws attempt to create a minimum standard of living to protect employees’ health and well-being. While these are noble goals, policymakers must also consider the serious consequences a minimum-wage increase can have on employment rates and economic growth.

Supporters of minimum-wage increases often argue employers paying their employees less than $15 place an additional burden on government services. A new study from the University of Washington (UW) analyzing the recent minimum-wage increases in Seattle found new evidence that increasing the minimum wage to $13 per hour has had a negative impact on the city’s total payroll, significantly affecting low-wage workers in Seattle. The study, which was commissioned by the City of Seattle, used a wider range of data than previous studies had, including employment data provided by the city.

The paper specifically evaluates the impact of the city’s minimum wage on Seattle’s low-wage labor market, which it defines as jobs paying $19 per hour or less. The study examines the changes to Seattle’s labor market after each of the recent incremental wage increases in the city: the hike to $11 per hour on April 1, 2015 and the increase to $13 per hour on January 1, 2016. The results measure the number of low-wage jobs available, the number of hours that workers in low-wage jobs worked, and the amount of money paid to workers in these jobs.

The UW/National Bureau of Economic Research study is different from other studies because it uses data from the State of Washington Employment Security Department, which is gathered each quarter from all employers in the state. Included in this data is the number of hours worked by employees. Washington is one of only four states to collect this data, which allowed UW researchers to accurately identify jobs that pay low wages and workers who earn low wages.  This is an improvement from previous studies, which had to narrow their focus to smaller groups such as food-service workers or teen workers.

The first minimum-wage increase in Seattle, from $9.47 to $11 per hour in 2015, led to only a modest reduction in employment. The second increase to $13 per hour on January 1, 2016, had a far more negative effect on the city’s labor market. While the study did find a 3 percent increase in hourly wages for low-wage employees, it also found a 9 percent reduction in the number of hours worked at wages below $19 per hour.

Minimum-wage laws require businesses to pay their workers higher wages, forcing them to make adjustments elsewhere to offset increased costs in order to maintain profitability. These cuts often lead to reduced hiring, fewer work hours for employees, diminished fringe benefits for employees, and higher prices for consumers.

The most damning effect found in the study was a $100 million per year reduction in the total payroll for low-wage jobs once the wage reached $13 per hour. This is the exact opposite of what these increases were meant to achieve. The results seem to indicate that any positive results of a minimum-wage hike are limited, and decrease dramatically if the rate is increased too high.

Advocates of an increase to the minimum wage often assume minimum-wage earners are the primary breadwinners for their households, but this is rarely the case. Economist Walter Williams has explained, “Workers earning the minimum wage or less tend to be young, single workers between the ages of 16 and 25. Only about 2 percent of workers over 25 years of age earn minimum wages.” A 2007 study from economists at the University of California-Irvine and the Federal Reserve Board examined the body of work on the subject and found 85 percent of the studies they considered credible demonstrate minimum-wage laws cause job losses for less-skilled employees.

Proponents of these laws also argue minimum-wage laws protect workers from exploitation by employers and reduce poverty. In a 2010 study, economists at Cornell University and American University found no reduction in poverty in the 28 states that raised their minimum-wage laws between 2003 and 2007.

Increasing the minimum wage is not an effective method of reducing poverty, and it harms workers by creating barriers to entry for less-skilled and less-educated people. Cities and states should steer clear of minimum wage hikes.

The following articles examine minimum wage hikes and their effects on employment.
 

Minimum-Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle
https://www.heartland.org/publications-resources/publications/minimum-wage-increases-wages-and-low-wage-employment-evidence-from-seattle
This paper from the University of Washington evaluates effects of the Seattle Minimum Wage Ordinance on wages, employment, and hours worked for low-wage workers in the city. “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. Evidence attributes more modest effects to the first wage increase,” the study concludes.

Counterproductive: The Employment and Income Effects of Raising America’s Minimum Wage to $12 and to $15 per Hour
https://www.heartland.org/policy-documents/counterproductive-employment-and-income-effects-raising-americas-minimum-wage-12-an
In this Issue Brief published by the Manhattan Institute, Douglas Holtz-Eakin and Ben Gitis examine the economic and policy implications of raising the federal minimum wage to $12 per hour or to $15 per hour. “We focus on how raising the federal minimum wage would affect the very low-wage workers whom the policy is intended to help. Overall, we find significant trade-offs in raising the federal minimum wage.”

The Minimum Wage Delusion, and the Death of Common Sense
http://www.cato.org/publications/commentary/minimum-wage-delusion-death-common-sense
Writing for Forbes, James A. Dorn of the Cato Institute argues the commonly held belief the minimum wage helps the poor is a delusion: “The belief that increasing the minimum wage is socially beneficial is a delusion. It is short-sighted and ignores evident reality. Workers who retain their jobs are made better off, but only at the expense of unskilled, mostly young workers who either lose their jobs or can’t find a job at the legal minimum.”

Busting 5 Myths about the Minimum Wage
http://blog.heritage.org/2013/03/05/busting-5-myths-about-the-minimum-wage/
James Sherk of The Heritage Foundation debunks five myths about minimum wage hikes, often used by proponents of minimum wage laws: “A higher minimum wage would help some workers, but few of them are poor. The larger effect is hurting the ability of potential workers living in poverty to get their foot in the door of employment. A minimum wage hike might help politicians win plaudits from the press, but it wouldn’t reduce poverty rates.”

Unintended Consequences of Raising the Minimum Wage
http://mercatus.org/publication/unintended-consequences-raising-minimum-wage
Antony Davies of the Mercatus Center examines arguments for and against minimum-wage increases and presents new results comparing employment for workers with differing educational attainments.

The Negative Effects of Minimum Wage Laws
http://heartland.org/policy-documents/negative-effects-minimum-wage-laws
Mark Wilson of the Cato Institute reviews the economic models used to understand minimum wage laws and examines available empirical evidence. Wilson describes how most of the academic evidence shows minimum wage laws have negative effects, and he discusses why some studies produced seemingly positive results.

Research & Commentary: Earned Income Tax Credit vs. Minimum Wage Laws
http://heartland.org/policy-documents/research-commentary-earned-income-tax-credit-vs-minimum-wage-laws
The Earned Income Tax Credit (EITC) and minimum wage laws have been two of the primary mechanisms the federal and state governments have used to help low-income families move out of poverty. A debate is currently ongoing in many state legislatures and Congress over which of these two policies is more effective and should be expanded. Recent studies have shown the EITC to be more effective. In this Research & Commentary, Matthew Glans examines the Earned Income Tax Credit and minimum wage laws from multiple perspectives.

Minimum Wages, the Earned Income Tax Credit, and Employment: Evidence from the Post-Welfare Reform Era
http://heartland.org/policy-documents/minimum-wages-earned-income-tax-credit-and-employment-evidence-post-welfare-reform-
David Neumark and William Wascher examine the effects of minimum wages and the EITC in the post-welfare reform era.

Raising the Minimum Wage Hurts Vulnerable Workers’ Job Prospects without Reducing Poverty
http://heartland.org/policy-documents/raising-minimum-wage-hurts-vulnerable-workers-job-prospects-without-reducing-povert
Although minimum wage laws are intended to reduce poverty, in reality, they encourage teenagers to drop out of school and reduce low-income workers’ future job prospects and earnings, observes James Sherk of The Heritage Foundation.
 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR