Ludwig Wittgenstein, FDR, and the Seattle Minimum Wage

May 6th, 2014 at 9:54 am

I haven’t followed all the twists and turns of the decision in Seattle to raise their city minimum wage to $15/hour.  But I’ve certainly heard a lot of the usual suspects complaining about it.

During a recent visit out there, advocates of the policy sought my views on the large increase relative to past such measures.  I told them it’s particularly tough to gauge its impact for two reasons.  First, there needs to be some quantitative work of the type I’ll describe in a moment.  And second, it’s an out-of-sample estimate.

A key thing to know when considering the impact of a minimum wage increase is the share of affected workers: the percent of the workforce in the sweep between the old and new minimum.  The fact of the just-announced long phase-in period for the Seattle increase, ranging from three years for some larger businesses to as many as seven years for some smaller firms, is highly germane (see this excellent chart on the proposed phase-in).

First, inflation will erode the value.  Using CBO’s inflation forecast, $15 in 2021 is $12.81 in today’s dollars.  Second, the nominal wage structure in the city will change over these years such that there will be smaller shares affected by any given increase.  One source pointed out that 24% of Seattle workers would be in the sweep–an historically very high share.  But that was in 2007, seven years ago and 14 years before full phase in!  Note how this Slate piece repeats that number without noting its antiquity.

So, unless they’ve already done it and I haven’t seen it–a distinct possibility–someone needs to do the analysis that factors in the phase in, the impact of inflation, and plugs in some assumptions about how the shares of workers in the sweep will evolve as nominal wages rise over the phase in years.

Until then, we should follow Wittgenstein, who admonished us as follows: Whereof one cannot speak, thereof one must be silent.  I grant you, that would wipe out the DC punditry, present company included, but…the dude has a point.

Despite the misleading sub-head, the Slate does a nice job of obeying Wittgenstein, though the author leans over his skies in places, going from “who knows?” to asserting that “there are good reasons to worry that the results would be ugly.”

In fact, there are good reasons to suspect that the Seattle experiment is “out-of-sample,” meaning previous empirical minimum wage research does not evaluate what will likely be, once the needed work is done, an historically large increase.  But how far out-of-sample, given the quantitative unknowns (at least unknown to me) cited above, we do not know.  And that of which we do not know, we must not speak.  It might well be ugly; it might well be beautiful.

Certainly, virtually every former such prediction by staunch opponents of minimum wages has been wrong.  It now looks like it’s going to take years to know, but we’ll find out if this one is too.

Finally, remember, as my colleague GL points out, what FDR said back in 1932, heralding work on the Fair Labor Standards Act that would come later, establishing the federal minimum wage:

“The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.”

Don’t you just love that??!!

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4 comments in reply to "Ludwig Wittgenstein, FDR, and the Seattle Minimum Wage"

  1. BillB says:

    The Seattle phase in is not as bad as you indicated. Businesses are divided into four categories depending on size and benefits. The largest business category phases in to $15 by 2017, not 2021. Thereafter the wage is inflation adjusted. The other three categories take longer to phase in but they all eventually converge on the same inflation adjusted wage of the first category. So the loss to inflation is only up until 2017, not 2021. Assuming 2.4% CPI, everyone will be making $18 by 2025.

    See the graph on this page:

  2. Larry Signor says:

    Jared is correct. Taking a side in the minimum wage debate is like rooting for your favorite sports team. There is a dearth of reliable analysis concerning the minimum wage, partly I suspect, because all the VerySeriousPeople know, they just know, raising the MW is a bad idea…for the wealthy. I will continue to root for my team and a higher MW.

  3. SeattleAlex says:

    Dig the quote…we’ll keep the rest of you posted if all hell does indeed break loose up here. Seems unlikely.

    • Jared Bernstein says:

      Thnx SA–do let us know what’s happening on the ground there in the land of strong coffee and drizzle.