That Seattle minimum wage study has some curious results.

June 26th, 2017 at 7:13 pm

[I’m outta town with very shaky internet access, but wanted to make a tiny bit of noise about this.]

I’m quoted in this story about a new paper on the Seattle minimum wage increase–it’s in the process of phasing up to $15/hr–as follows:

“The literature shows that moderate minimum wage increases seem to consistently have their intended effects, [but] you have to admit that the increases that we’re now contemplating go beyond moderate. That doesn’t mean, however, that you know what the outcome is going to be. You have to test it, you have to scrutinize it, which is why Seattle is a great test case.”

I still think that. But I also think something seems pretty “off” with the study, reviewed here by the WaPo.

–How could they get such job- and income-loss effects for low-wage workers in Seattle relative to their controls with such tiny wage effects? This is especially curious when considering the excellent point made by Schmitt and Zipperer, who critically review the Seattle study, that compared to Seattle’s relatively high wage base, $13/hr isn’t that far out of the usual range (be sure to read their critique).

–It seems extremely unlikely that increasing the min wg to $13 leads to job growth for those making >$19. I can’t think of any labor market logic to that.

–The Seattle economy is doing really well, with solid job and wage growth amidst very low unemployment. I’d think that if the increase threw such a large wrench into the low-wage labor market as this study suggests, we’d see it in the broader economic statistics.

When you have an outlier study–their negative results are huge multiples of past research—with such unusual “internals,” there may be something wrong. It could be the multi-establishment firms they left out, though if the increase is whacking smaller firms, that’s a problem too.

So I suspect their control cohort—the other parts of the state that are serving as a control—is non-independent of the Seattle increase. This new study from Allegretto et al doesn’t have the granular data available to the Seattle researchers but it uses what looks to me like a more credible control cohort and finds the Seattle increase to be having its intended effect.

Like I said, those of us who support out-of-sample min wg increases need to scrutinize the Seattle experience closely, and protect against confirmation bias. This time may actually be different. But you really don’t want to make that claim based on one extreme outlier study with some eyebrow-raising quirks.

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29 comments in reply to "That Seattle minimum wage study has some curious results."

  1. Kaleberg says:

    I’m also a skeptic. Seattle is undergoing a huge boom with construction cranes building corporate offices, medical centers and apartment buildings left and right. New restaurants, new beauty salons and other service businesses are popping up at an impressive rate. There is actual competition for low wage workers. If nothing else, rising rents mean that low wage workers will consider leaving Seattle to find a better pay-rent balance if they can’t find a job with better pay. If you want a pot washer, sales clerk, security guard or receptionist, you have to pay more.

    In that sort of climate you would expect to see people changing jobs for higher wages and employers offering higher wages to acquire and retain employees. The number of $13 hours would drop while the number of $19 hours would rise. We have so rarely seen situations like this since the 1970s that I’m not surprised that economists have trouble interpreting the results, but this is Economics 101. Rising demand is meeting limited supply and prices are rising, except for labor. No one is surprised when petroleum prices go up and the number of $2.00 gallons of gasoline sold drop and the number of $2.50 gallons of gasoline sold rise. Just because employers have gotten used to be able to set wages on a take it or leave it basis, doesn’t mean that the laws of economics have been repealed.

    • Brian says:

      Can you explain the gasoline logic again, is the theory that the delta to the next higher good is smaller so people will switch to a premium product?

      Also if people are moving into high non-minimum wage jobs we should be seeing a large number of vacant minimum wage jobs? I think the overall conclusion of the study and media reports is business are cutting back on hours and becoming more efficient due to the cost of labor. Which is aligned with basic economical theory of supply and demand.

      • Smith says:

        The gas analogy probably implies $13 minimum pushes up the wage scale, pushes wages previously $13 or greater than $13. This can result in less low paying jobs and more higher paying jobs, because less paying jobs are actually cut a bit, but some sub mid level paying jobs now pay cross into the mid level, passing a $19 threshold.

      • Kaleberg says:

        If the mean retail price of gasoline is about $2 and wholesale prices start to rise, just about every gas station is going to start raising its prices to maintain its profit margin. If the mean retail price hits $3, very few $2 gallons of gasoline are going to be sold. No one can afford to sell them. Meanwhile, a lot more $3 gallons of gasoline are going to get sold. It’s not that people are suddenly preferring $3 gasoline or worrying that $2 gasoline is going to ruin their engine. It’s that gasoline prices are higher.

        I think sandwichman at Angry Bear basically nailed it. If the minimum wage rises in a booming economy, the base wage rises and employers have to compete to retain their employees and hire new ones, so wages will rise across the board. If wages are rising across the board, you can choose an arbitrary threshold and you will see lower paid work vanishing even as higher wage jobs are being created.

        It’s simple arithmetic. Put your threshold at the median. Half your wages are higher, half are lower. Give everyone a 5% raise, but don’t change the dollar value of the threshold. Now fewer than half the workers are below the threshold, but more are above it. It’s an artifact of choosing a threshold. If you choose the median, you don’t get this effect.

        It takes an economist to consider losing a $13 an hour job, but getting a $19 an hour job to be a bad thing.

    • Anglo-Saxon says:

      Nominal wage growth in the post-war era wasn’t that large. It was just we did not have any inflation and real wages boomed until the breakdown of BW’s.

      If workers are demanding huge increases, that is because inflation is running out of control due to broken markets ala what happened when BW’s collapsed in the late 60’s.

  2. Serene says:

    Economists are strange.

    Clearly the current minimum wage is pretty arbitrary. That is to say there’s no economic justification for it — it is purely a political outcome unrelated to any economic evidence.

    Yet when we talk about raising the minimum wage we demand that economists study it very closely and determine the exact effects in isolated regions before raising it elsewhere. We demand exact proof of the net effects determined by arbitrary measuring techniques. Given the up front demands, the discussion is strongly biassed towards doing nothing. This sounds like an idea created by politicians that love the status quo.

    Given that so many economists have no idea what they are doing, I don’t have any confidence in this approach or any studies associated with it.

    First of all, given enough time the actual makeup of businesses should change in response to a rise in minimum wage. There may be fewer or more fast food restaurants, there may be fewer or more janitors, there may be fewer or more robots doing jobs, etc… You simply aren’t going to be able to create a controlled study with an accurate measurement of the effects in time for it to matter.

    If treated as a macroeconomic issue, there’s only one thing in the long run that can cause harm to low-wage workers due to a rise in minimum wage, and that is increased outsourcing to low-wage nations. This is pretty basic macro. Dare I say it should be macro 101.

    This isn’t hard, people!

    • Denis Drew says:

      Best survey on the success of minimum wage hikes would be the people it affected. What do they think? Some who lose jobs can wait for better paying job and keep it — who needs it most keeps it most.

      What you really want is a fair market based labor priced which can only be ascertained by collective bargaining. Coming soon in California and other states:

      In BALLOT INITIATIVE states, it typically takes only 5% of the number signatures of registered voters of how many voted in the last governor’s election to put your initiative on the ballot. (OR, CA, MO, MI, OH, OK, CO, NE ND, SD, MT)

      Check the numbers of who should line around the block to sign an initiative making union busting a felony: nationally, bottom 45% income share has dropped from 15% to a penurious 10% over two generations (as per capita income doubled).

    • Serene says:

      Any move that happens too fast can cause disruption, but if done at a reasonable pace markets will adjust, and many times in ways nobody predicted.

      There can be regional exceptions to what I said, and there is a possibility some people would have to move to accommodate labor shifts, but this can be remedied with a properly used EITC. This is really the only area I can see that requires more detailed economic study. You can use a guess to start with as long as you provide a means to test and adjust the subsidies. I know this kind of technical management is too much to ask of congress, but there must be some way to provide reasonable technical administration of the shift.

      • Denis Drew says:

        “a properly used EITC”?

        Bottom 45 percentile incomes have lost 5% of overall share over two generations. Making up for that with EITC would require $700 billion a year. Who would decide which workers got what? We might end up on line for hours to buy toilet paper.

        What’s wrong with good old collective bargaining — deciding prices according to consumer demand; not how little the most desperate for anything workers can be paid? No need for advanced technical arguments — let the (actually) free market decide wages.

        • Serene says:

          I have nothing against collective bargaining, but even at the height of the unions it only affected a minority of workers at mostly larger corporations. Unions are fine, but they don’t solve the problem.

          I think you have an uphill battle in trying to argue that collective bargaining is a free-market solution. I don’t see it.

          Minimum wage lines have always been a political, ethical decision rather than an economic one. Markets handle it very well. Individual business owners or employees might gripe about the adjustment period, but that’s just what happens in a market economy.

          I don’t like the EITC except as a regional stop-gap for labor disruption. Minimum wage is the proper choice in my view. The inclination to use the EITC as a replacement for minimum wage is a terrible idea in my view. It is the result of deceptive lobbying by certain corps.

          The federal government should probably just raise the minimum wage and provide a provision for state and local governments to substitute an EITC if they are experiencing too much disruption. No federal subsidies.

          • Serene says:

            And to but it more bluntly, if chuck and the party decides to come out with an economic plan that relies heavily on the EITC, they’ll get zero support from me. No vote. The plutocratic purity of these people is an abomination.

      • Smith says:

        EITC is mostly evil corporate welfare penalizing fair wage employers. Favored by Reagan, Bush, Speaker Ryan, and Republicans everywhere, it’s good to see another opposing voice. Why this blog wants to divert anti poverty money to treat a symptom instead of cause is beyond me. Leave EITC to Eric Mankiw. How about quality childcare instead?

        • Serene says:

          It seems to me that the Democratic leadership (people like Schumer) enjoy putting poor people onto the same side as his rich, corporate base. He and those like him want poor people to be required to fight for his special interest base if they want any relief from their oppression. And our demand to use government to help those who need it rather than picking corporate winders is derided as ‘purist’ by these monsters.

          The current Democratic leadership is horrendous. This includes almost all of them including the O/B/P/C team.

          Rather than fight for those that need it, these people want to fight pointless battles about PC language in the ‘press’. It doesn’t seem that any message, including losing, makes any difference to them. Generally they don’t seem to think policy is important, but rather only winning is important. We have a 2-party plutocracy. At least one side can claim ignorance.

    • Kaleberg says:

      It’s hard to outsource restaurant jobs, and new restaurants are opening in Seattle almost daily. It may be possible to automate some, and a number of high end restaurants are investing more in training and paying more to keep their well trained workers. When labor is cheap, quality and turnover aren’t big issues. When labor is expensive, you want to make sure you are getting your money’s worth.

  3. Bob Palmer says:

    If raising the minimum wage causes the dire economic harm that critics claim, how can we explain robust growth in the mid-twentieth century, when unions negotiated raises? Union wage increases set the tempo, nonunion wages followed. The Republic survived. Functionally union wage increases then were the same thing as minimum wage increases now. The mid-twentieth century was a period of great prosperity for regular Americans not equaled since. This suggests that the Seattle study results were off.

    • Anglo-Saxon says:

      Most of that was driven by war. That is a painful truth people don’t want to admit.

      • Smith says:

        Totally false, easy to prove, look at all trends before WWII even started and before the US started military buildup before entering WWII. The trend shows recovery continuing aside from the downturn in 1937 caused by ill considered austerity. Likewise, postwar continued prosperity was not due to bombed out Europe and Japan and lack of competition. Trade was a smaller part of our economy, and our deficit today is biggest with China, not Europe and Japan, though Germany and Japan do take a healthy bite, as does Mexico, and previously Canada.
        The war story is a myth. The depression ends without or without the death of millions in Europe and Asia.

        • Anglo-Saxon says:

          The trends before WWII started? Not impressed. Most were based on debt expansion and then investment contraction. The 1920’s was the first attempt by the US as a “matured” power and it flopped badly. War generated the 2 biggest growth periods in the post-war era. Pure and simple. That is what happens

        • Kaleberg says:

          I agree, the recovery was well under way well before the war started, but the war put the recovery into overdrive. The recovery from 1938 on was partly driven by English war orders. I was reading some old issues of Fortune and the shift was striking. Suddenly all the liquor and luxury good ads were being replaced with ads for conveyer belts and flooring systems.

          • Smith says:

            If you look at total imports, exports, balance of trade, percent of GDP, it doesn’t look like the continued recovery in the late 1930s is owed to pre war build up or trade with England. Yes the actual war years tended to give GDP an extra lift, followed by expected demobilization slowdown in growth immediately afterwards. But the overall trend lines show you don’t need millions to die for a robust economy. The war story is a myth, even if mainstream liberals lend it credence, it doesn’t make it true. The numbers show strong peaceful economic recovery growth was and is possible.

            Google this for graphs and figures:
            Chart of US Gross Domestic Product, 1929-2004

  4. Denis Drew says:

    One angle I’ve seen on this study is the supposed “worry” that progressive academics have about lower skilled workers being left back as higher skilled are hired for better wages. What is that the middle class (remember us?) are willing to come back to work again for more adequate wages.

    Sacrificing higher skilled workers to give that lower skilled a chance to “get on the ladder” may sound humane on campus but it translates in the our world to giving our jobs to immigrants — which is why 100,000 out of my guesstimate 200,000 Chicago, gang age males are in drug dealing street gangs.

  5. Kevin Purcell says:

    I have a question. Has the total hours worked by all employees dropped? If it has not, then the wage has not actually reduce hours available but spread among more people. If this is the case, then it appears more of a punishment response by employers rather than the effects of the wage increase.

    • Kaleberg says:

      Total wages in Seattle are way up, with competition for workers pushing up hourly rates across the board. If the study is to be believed, so many workers have gotten raises that low wage workers are vanishing. It must be awful to lose one’s low wage status and have to accept more money for one’s work. (That’s sarcasm.)

  6. Denis Drew says:

    Over two years 16,000 out of 39,000 under $13/hr jobs eliminated.

    Over same two years ONLY 6,000 out of 92,000 under $19/hr jobs eliminated — SAME OVERALL POOL. Sound like bracket creep?

    Over the very same two years 44,000 jobs ADDED to the starting 292,000 pool — bringing it to 336,000. More like flying bracket leap.

    To double-check, let’s check Seattle’s RUN-AWAY-ECONOMY:
    3.1% unemployment
    $80,000 median household income
    Anecdotal reports of building cranes crowding downtown and scraping bottom of barrel searches for low skilled workers.

    • Denis Drew says:

      So many news reports obsess on Seattle’s under $19/hr jobs following the minimum wage raise — down 6,000. (Down 16,000 for under $13/hr jobs — same study, same overall pool.) Do you suppose if the study had drawn its line at say, under $21/hr jobs instead, it would have reported zero job loss — but lots of wage growth for the headlines? :-O

  7. Raven Onthill says:

    I think the Evans School study failed to adequately control for dramatically rising rents in Seattle (IIRC their control was neighboring counties, where rents are not rising as dramatically) and this, combined with with its focus on the corner shop, rather than major chains of small shops, probably skewed the results.

    This needs to be looked at more carefully.

  8. Zach says:

    –It seems extremely unlikely that increasing the min wg to $13 leads to job growth for those making >$19. I can’t think of any labor market logic to that.

    Couldn’t it just flow from increase in aggregate demand?