Does raising the minimum wage force businesses to eliminate so many jobs that it hurts the very people it was intended to help? New research in Seattle seems to say that it does. But researchers left some important elements out of the equation--such as Amazon, the city's largest employer.

The idea that employers forced to pay higher wages to unskilled workers would eliminate jobs to keep their payroll from going over budget seems logical enough. But over the years, most studies of minimum wages and jobs have shown that doesn't happen. This week, researchers at the University of Washington completed a very detailed study of Seattle's experiment of gradually raising the minimum wage to $15.

Their results show that Seattle employers had indeed decreased payroll to compensate for the higher minimum wage, by letting employees go, reducing their hours, or putting off planned hiring. The costs to unskilled workers outweighed the benefits three to one, the UW researchers say, because the higher minimum wage caused employers to cut hours for low-wage workers by an average of 9 percent against a 3 percent increase in income because of the law. The result, they say, is an average net loss for workers of $125 per month--a significant amount for someone at the lower end of the economic spectrum.

The study is getting a lot of attention, not only because it contradicts decades of earlier research but also because it's using data from Washington State on what workers earn and how many hours they work--much more detailed data than any researchers have been able to use before. Nevertheless, other researchers have questioned some of the UW study's methodology. Chief among them is a team from UC Berkeley, who recently completed their own study. The Berkeley study, conducted with less detailed data than the UW version, was consistent with earlier findings that raising the minimum wage had not caused Seattle employers to meaningfully cut hours or jobs.

Who's right? The UW study, based on more specific data than anyone else has had so far, is certainly compelling but it has one serious flaw. To avoid including employers that might not be subject to the new law, the UW researchers left out companies with offices both in Seattle and elsewhere--in essence, every large company. That means they skipped the region's three largest employers, Boeing, Microsoft, and Amazon.

Amazon is a particularly meaningful omission because the bulk of its local jobs are within the city, and its warehouses employ large numbers of unskilled workers who might be directly affected by the new law. The online retailer is expanding rapidly in Seattle, building new offices and warehouses. It currently has 30,000 employees working in the city, and is trying to hire another 10,000. In 2022, when construction on its new buildings is complete, the company will account for more than 20 percent of the city's office space.

Studying minimum wage law effects without including large companies completely skews the results, the Berkeley researchers argue. And it's true that if some of the workers getting fewer hours from the small employers counted in the study are now also working for Amazon (or any other large company), they could be earning more than they were before the minimum wage hike, but this study would show them as earning less. That's a concern, especially when you consider that many low-wage workers have multiple employers. However, the UW researchers stand by their data, citing evidence that large employers are, if anything, even more likely than small ones to cut hours or jobs in response to a higher minimum wage.

How much is a low wage?

A second issue with UW's methodology is how it defines a low-paid worker, as someone earning $19 or less per hour. That threshold makes sense in that it would seem to leave out most people not affected by the minimum wage. On the other hand, the Berkeley researchers argue, some of the low-wage earners in the study may be getting work that pays more than that amount, which would also fail to show up. The UW researchers do note an increase in jobs at their ceiling level of $19 an hour, suggesting that there may also have been an increase at slightly higher pay rates that the UW team isn't seeing.

Who's getting these higher-paying jobs? Their data doesn't answer that question, but the UW researchers hypothesize that since employers are forced to pay a higher minimum wage anyhow, they are hiring more experienced workers at higher salaries, aiming to make up for the extra cost with increased productivity. If that's true, it would certainly be bad for minimum-wage workers. On the other hand, the higher hourly wages could also be a result of Seattle's tightening labor market.

"Synthetic" Seattle

And then there's the question of what would have happened to wages and employment if the minimum wage hadn't been raised. Research such as this tends to assume everything would have remained unchanged, but given the rapidly evolving local economy, that probably isn't true here. So the UW researchers attempted to compensate by creating a hypothetical "synthetic" Seattle, using data from municipalities outside King County but in Washington that have had similar trends. Critics say that this doesn't work--you can't synthesize Seattle with data from other places around the state, because Seattle is completely different from anyplace else in Washington. Having lived in the Seattle area for the past three years, I tend to agree. Seattle is unique, if only because of Amazon's rapid expansion, which is changing the city in such striking ways that locals call it "Amageddon."

If Seattle doesn't have an unemployment problem, it definitely does have a housing problem. Estimates vary, but there's a general consensus that rents in Seattle have been climbing between 7 and 9 percent. The city's dramatic building boom might eventually create enough extra supply to slow that increase, but there's little evidence of that yet. Homelessness is a growing crisis.

That means that one of the biggest arguments against minimum wage increases--that they cause wages to rise much faster than inflation--isn't true in Seattle. Housing costs here have climbed by more than 50 percent this decade, eating up a large portion of unskilled workers' newly higher wages.

There's only one Seattle

That's the most important thing to remember about all this. Seattle is in the midst of a transition from a second-tier city driven by forestry, fishing, shipping, and airplane manufacture to a first-tier city with a huge technology footprint. More people are moving here from elsewhere than at any time since the Gold Rush. In the midst of all this, is a higher minimum wage good or bad for unskilled workers? My instincts say it's good, but I'll admit that the conflicting data makes it hard to be sure.

But one thing's for certain: It would make no sense at all to take research about Seattle and use it to predict what effect a $15 minimum wage might have in other places. The city is in a category of its own.

Published on: Jun 27, 2017