The Subtle, Negative Effects of Seattle's $15 Minimum Wage

See Jacob Vigdor on Seattle's $15 Minimum Wage from EconLog.

"In the latest EconTalk, both host Russ Roberts and economist interviewee Jacob Vigdor do a great job of discussing Vigdor’s and his colleagues’ 2016 study of Seattle’s large increase in the minimum wage. Russ asks pretty much all the right questions at all the right points. I highly recommend it.

A few highlights follow.

First, the humorous part about different expectations on the cost of the study:

Jacob Vigdor: And it turns out that the City of Seattle had put out a request for proposals. Because they were commissioning a study of the impact of the minimum wage. And so, I joined a group here at the U. of Washington that was putting a bid together for that contract.

Russ Roberts: And, you won that bid, presumably.

Jacob Vigdor: Well, we were the only bidder. It was kind of a funny story. Because, you know, usually a request for proposals will say things like, ‘Well, here’s the budget that we’re looking for.’ Or, ‘Here’s the [?] we have to award.’ There was no such information in Seattle’s RFP [Request for Proposal]. So, we looked at the scope of work that the City had put into this Request for Proposals. And we just sort of penciled out how much that would cost to get all that work done. And we put together a bid for $1.7 million dollars. And then, right after we submitted the bid, the Mayor put out his proposed budget. And in the Mayor’s budget we saw that there was a line item for this study for $100,000.

The main finding–on hours worked:

Russ Roberts: And, so tell us what you found.

Jacob Vigdor: So, when we did this methodology, what we found was, first of all, the minimum wage did appear to raise wages. Which is–sort of a–that’s what we expected to see. But when we looked at employment, we actually saw a reduction. And the reduction was actually a little bit larger in magnitude when we looked at hours worked rather than just simple head-count measures of employment. So, basically, what we’re coming up with and the revised estimates that we’ve put together suggest that wages went up about 3%, as a result of the minimum wage increase; but then hours were down about 6 or 7%.

Whose hours fell?

Jacob Vigdor: So, when we look at the low-wage labor market overall, what we’re picking up is the amount of money paid out in the low-wage labor market declined. But that’s, of course, lumping together. When we looked more specifically at the trajectories of individual workers with differing levels of experience, we found that the more experienced workers were coming out ahead. On average they were taking home–not necessarily taking home, but their paychecks were reflecting an extra about $20 a week. The less experienced workers who at least had a job to start with, were more or less breaking even: their increase in hourly wages was being pretty much offset by a reduction in hours. And then, the big losses in terms of much lower pay would be amongst the workers who hadn’t even entered the labor market yet when the minimum wage started to increase, because they were finding it harder to find any work at all.

Russ Roberts: Help me think about those people. So, I’m a–maybe I’ve been out of the labor force, or maybe I’ve just turned, I’ve just left school. And I’m looking for work; I don’t have a lot of skills, and I’m trying to get a job as a dishwasher or a gardener–helping somebody with gardening or contracting. And, you’re saying I’m not going to find the work to start with? Is that the issue?

Jacob Vigdor: Yeah. So, there are lots of job openings in Seattle. But the general pattern is that employers are emphasizing experience. And, you know, as economists we tend to talk about skills. But the Number 1 skill that you can have as a dishwasher is experience being a dishwasher. So, typically, if you are a dishwasher in a restaurant kitchen, you are going to be using equipment; and if you have some familiarity with that equipment already, you don’t need to be trained. You can be productive starting from Day 1 on the job. And that’s really what employers are emphasizing. They are really interested in having people who have familiarity with the job already, who do not need to be trained on the job. Because on-the-job training is an investment, and at $15 an hour that investment doesn’t make sense from the business owner’s perspective.

Substitution on many margins:

Jacob Vigdor: Yeah. One of the most interesting conversations that I had regarding the restaurant industry: I got a call, shortly after I signed on to this study, from a person who was the CEO [Chief Executive Officer] of the Washington Restaurant Association. He wanted to meet, and he wanted to just kind of bend my ear and get my perspective about–what perspective we were taking. Basically, he just wanted to see, ‘Okay, are you guys just sort of hook, line, and sinker going to write a study where the conclusions are foregone conclusions? Or are you really doing this on the level?’ And so the interesting part of that conversation was, I sat down with this CEO of the Washington Restaurant Association, and the first thing he said to me is, ‘We’re going to be fine. Our members of this Association–the minimum wage, it’s not going to break them.’ And the reason why, he said, is because, ‘there are so many strategies that we have to basically reduce our labor.’

Russ Roberts: Right.

Jacob Vigdor: And he proceeded to tick off about 8 different specific business strategies that a restaurant owner can use to cut back on their use of low-wage labor. And these include things like, instead of hiring a prep cook to chop vegetables for you, you just order chopped vegetables. And, so, that eliminates that job from your kitchen.

Russ Roberts: And, you order them from an area that doesn’t have a $13 or $15 minimum wage, so they are cheaper than they would be if you did it yourself.

Jacob Vigdor: Yes. Those vegetables might be chopped in Mexico, for example. Another thing that he mentioned, and this is something that we see quite a bit in Seattle–so, there’s a move away from table-service restaurants to order-at-the-counter type restaurants. So, if you are imagining a restaurant where you go, you sit down, someone comes to take your order–that person is on the clock; you have someone delivering your food–that person is on the clock; you have someone bussing your table–their hours are on the clock. The new style of restaurant in Seattle, and actually one of the closest restaurants to my house did this transition over the past couple of years. You go; you order at the counter. They call out your number or your name when the food is ready, so you are the one transporting the food to your table. You are the one bussing your table when you are done. And so basically what had been tasks accomplished by low-wage workers on the clock are now being accomplished by an unpaid person–which is the customer. So, little tweaks like this–that’s how restaurants have coped. And it’s absolutely true that the restaurant industry in Seattle is, by and large, doing fine. There are some closings; but there are quite a number of openings as well. Our efforts to try to understand whether the minimum wage has impacted the business opening and closing rate have generally found that we don’t find any effect. But what we do find is that the patterns of openings and closings are steering the city towards less labor intensive restaurants. So, we’re moving away from full service. We’re moving towards order-at-the counter and other forms of serving people food that involves fewer labor hours.

The competing Berkeley study:

Jacob Vigdor: There are just as many low-wage workers in the health care industry as there are in the restaurant industry. The difference is that–you’re right. It’s a higher proportion of restaurant workers are low-wage workers. Because in the health care industry you also have doctors and nurses and people who–you’ve also got custodial staff, cafeteria staff. You’ve got all sorts of employees in the health care sector that are low paid. Anyway, I think that the Berkeley study of the restaurant industry–it’s reliable as a study of the restaurant industry, because they are finding the same result that we found when we did our analysis of restaurants in Seattle. Namely that, overall restaurant employment shows no negative impact. There are just as many jobs in Seattle restaurants as we would have expected without the minimum wage increase. Now, there’s an asterisk there, which is, we’re talking about all jobs in the restaurant industry. Not only low-wage jobs. So, the Berkeley study used a data set that didn’t give them the capacity to study low-wage workers specifically. Our data set allows us to do that. And, what we found is that if you look at low-wage employment in the restaurant industry, rather than overall employment, and if you look specifically at hours instead of number of jobs, you do find these negative impacts. And so, I think that one of the things we’re picking up from our data analysis is that there are quite a few people in the low-wage labor market in Seattle who have kept their jobs. And so, if you are just counting up the number of jobs, it might look like it hasn’t changed very much. But the difference is that they are seeing reductions in their hours. So, a reduction in hours is something that Berkeley’s study can’t [find].

Why the long-run effect on low-wage jobs could be even more devastating:

Jacob Vigdor: So, once a restaurant in Seattle figures out, ‘Hey, I can save on labor costs by just having my customers bus their own dishes,’ then, if that business practice filters out into other parts of the country, then our control groups start to see some reduction in employment as well. And this is actually the story–I mentioned a little while ago the conversation I had with the CEO of the Washington Restaurant Association. And this was his story. His story was, ‘Minimum wage increases force businesses to think up new ways to economize on labor. Once they’ve thought them up, those business practices filter out into other parts of the country.’ And so, it could very well be that in the long run, the treatment-versus-control difference in something like low-wage employment could actually dissipate. But the reason for the dissipation is that in the long run, we are going to see across the board the number of opportunity for low-wage workers declines, because all the businesses have adopted these changed practices to cut down on their use of low-wage labor.

Political operative doesn’t care if the long run comes quickly:

Jacob Vigdor: I had a political operative from the Seattle Mayor’s office come visit me a couple of years ago. This particular staffer from the Mayor was wondering if I would be willing to sort of go out in public and advocate for a higher minimum wage. And, I responded by saying, ‘Look, that’s not my job. I’m not an advocate. I’m a researcher.’ And I mentioned to him that our research was actually showing that there were some potentially adverse impacts of Seattle’s minimum wage. And he responded to me by saying, ‘Well, in the long run, aren’t these jobs going to go away anyway?’ And so, this is coming from someone whose job description is to be a minimum wage advocate."