The city of Seattle has the highest minimum wage in the United States. While economists and policy-makers continue to debate the issue, a recent working paper from researchers at the University of Washington (UW) raises serious questions about the effectiveness of minimum wage hikes. The paper – an official study commissioned by the city of Seattle itself – examines the second phase of the Seattle Minimum Wage Ordinance, which raised the city’s minimum from $11 to $13 per hour in 2016 with the eventual goal of $15 per hour.
In short, the study concludes that the “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.” The researchers explain, “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.” If this study holds up to scrutiny, it will show that, contrary to their intention, those who hoped to help workers at the bottom have actually made things worse.
The first phase raised Seattle’s minimum wage from $9.47 to $11 per hour in 2015 with relatively no negative effect on unemployment or hours worked. So why is the second phase different?
According to Ben Casselman and Kathryn Casteel at FiveThirtyEight, “In high-cost Seattle, not many workers earned less than $11 an hour even before the law took effect.” In my recent book, Foundations of a Free & Virtuous Society, I note that “Sweden, Denmark, Iceland, Norway, and Switzerland have no national minimum wages but still enjoy high standards of living.” Why don’t employers in those countries – often inaccurately assumed to be socialist – lower wages to oppressive levels? I explain that it is because,
Wages are naturally regulated by the free preferences of workers. So another way to look at it is that minimum wages aren’t bad, as long as they fall below the lowest equilibrium point. But that also would make them moot, the virtual equivalent of not having a minimum at all.
Casselman and Casteel quote MIT economist David Autor as saying, “Nobody in their right mind would say that raising the minimum wage to $25 an hour would have no effect on employment…. The question is where is the point where it becomes relevant. And apparently in Seattle, it’s around $13.” Considering the foregoing, we may be more precise: The point where minimum wages become relevant is where they are no longer below the labor market’s natural equilibrium, where supply freely meets demand.
The difference between the first and second phases of the Seattle Minimum Wage Ordinance demonstrates this basic economic reality. Fixing prices on anything will have no effect so long as the price is below what buyers and sellers would freely agree to on their own anyway. However, when that is not the case, we end up with supply surpluses. In the case of labor, that means we have more would-be workers – i.e. unemployed persons – than jobs available at that pay rate.
“The jobs lost to minimum wages are some of the most crucial in an economy.”
This is no mere economic matter. As Casselman and Casteel note, “while experienced workers have probably benefitted from the higher wage, new entrants to the labor force, including teenagers, have probably lost out.” As I note in my book, citing Anthony Bradley’s Black and Tired, not only teenagers but “low-skilled minorities” tend to be the ones left out of the labor market due to such imprudent minimum wage hikes. There is a moral concern here as well: “The jobs lost to minimum wages are some of the most crucial in an economy.” Based on this study, youth and low-skilled minorities in Seattle will likely lack key opportunities they would have otherwise had to work their way up the social ladder by gaining needed work experience.
Of course, as Casselman and Casteel point out, this is just one study, and it is not without ambiguity. The restaurant industry doesn’t seem to have been negatively affected, for example. Furthermore, we will have to wait and see if the study passes peer review, and even then it would be just one contribution – the real test is whether other studies confirm the UW researchers’ findings. Given the basics of supply and demand, however, don’t be surprised if they do.
Yet all of this is somewhat beside the point. The study may confirm that minimum wages hurt the workers they are meant to help, but how then do we help them? If wages were already at equilibrium, how come some people had to settle for $11 per hour in high-cost Seattle?
While, of course, intentional discrimination does happen and may be a factor, it isn’t a big stretch to surmise that the struggle of low-skilled minority workers largely stems from the fact they have so few marketable skills. Doing more to promote vocational training and entrepreneurship in these communities would be a good first step, though more research may be required to determine what other barriers to entry might be holding these communities back.
All that is to say, there is a lot of work to be done for middle-class Christians eager to come alongside the working poor in our country as they seek to develop their abundant, God-given potential. People need not wait around for the state to do what they can and ought to do on their own. Many churches, ministries, and other organizations already offer job training and placement, for example. This is a good opportunity for others to emulate their successes.
Unfortunately, developing meaningful, mutually-uplifting relationships with people outside one’s own communities takes hard work. Voting for an ordinance, on the other hand, is easy. One need not even know a single low-wage worker to do that, making it all the easier to turn a blind eye to the unintended consequences of bad policy. But the UW study of the Seattle Ordinance shines a light on the dark side of minimum wages, suggesting that – though laudably trying to link poverty alleviation to work – not only do they not help, they hurt. The “Fight for $15” is a self-defeating battle Christians who value the virtue of prudence and upward economic mobility for all would do well to avoid.
Header image used under Creative Commons Attribution 2.0 Generic (CC BY 2.0) License. Image scaled and cropped.