Sunday, August 7, 2016

Seattle’s failed minimum wage experiment

From the Fraser Institute.
"But a new study from researchers at the University of Washington should provide sobering evidence for minimum wage proponents. It shows that Seattle’s minimum wage policy thus far has been a failure in terms of actually increasing the average earnings of low-wage workers.

Again, this is hardly surprising given the volume of existing academic research finding minimum wage hikes negatively affect the employment prospects for low-skilled workers. While the most productive workers may gain from a higher minimum wage, less productive workers (typically young workers first entering the workforce with minimal experience) lose out on jobs and/or hours worked. The University of Washington study concludes the losses offset the gains.

The study looks at data from June 2014 (when Seattle’s minimum wage ordinance was passed) to the end of 2015 (latest available). Seattle’s $15 minimum wage is being implemented in stages with full implementation by 2021. The first increase took place in April 2015, from the statewide rate of $9.47 to a new city-level minimum wage of $11.00. (Seattle’s minimum wage was increased again in January 2016 to $12.00 for employers with 500 or fewer employees and $13.00 for other employers.) So the study only measures the impact for the nine months after the first minimum wage hike.

Superficially, the initial minimum wage hike does not appear to have hurt job prospects in the city. Seattle’s job growth rate tripled the national average from mid-2014 to the end of 2015.

But as the study notes, the job growth figures had little or nothing to do with the minimum wage. During the period under analysis, the city enjoyed steady growth in tech sector employment as well as a construction boom. So looking at the overall job numbers alone tells us nothing about the impact of the minimum wage hike, which would mainly affect low-skilled jobs anyhow.

Instead, the study’s approach is to compare what happened in Seattle with other, similar Washington communities where the minimum wage did not increase. It finds that employment growth in Seattle would have been even stronger had the city not increased the minimum wage. Specifically, the study finds that:

• Seattle’s minimum wage hike led to a 1.2 percentage point decrease in the employment rate of low-wage workers (defined as earning $11.00 an hour or less).
• The number of hours worked by low-wage workers fell due to the minimum wage hike (by an average of 4.1 hours per quarter).
• The likelihood of low-wage workers continuing to work in Seattle dropped by 2.8 percentage points, meaning that more low-wage workers were seeking jobs outside of the city limits.

The study concludes that the negative effects on employment “appear to be roughly offsetting the gain in hourly wage rates, leaving the earning for the average low-wage worker unchanged.”

The findings are for just nine months after the change in the minimum wage. As the authors note, the negative effects are likely to be considerably larger over a longer time period. And the complete effects will occur only after the minimum wage hike to $15 per hour is fully implemented in 2021.

Over time, minimum wage hikes will discourage future job growth and employers will seek ways to reduce the artificially higher labour costs by cutting back on hours, providing less on-the-job training, and switching to more automation."

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