Seattle's minimum wage, revisited

As I noted in a post back in 2017, the initial research on Seattle's minimum wage showed that, although workers earned more per hour, they worked fewer hours and so the net impact on earnings was basically zero. That was based on this NBER Working Paper (ungated here) by Ekaterina Jardim (University of Washington) and others. Now, Jardim et al. have re-visited the effects of the minimum wage in a new NBER working paper (which appears to be ungated, but just in case it is also available here), as the New York Times reported back in October:

Seattle increased its minimum wage for large employers to $11 an hour, from $9.47, in April 2015, then to $13 for many of those same employers in January 2016. (The minimum wage increased by less for small employers, and for large employers that contributed toward workers’ health coverage.)

In their latest paper, which has not been formally peer reviewed, Mr. Vigdor and his colleagues considered how the minimum-wage increases affected three broad groups: People in low-wage jobs who worked the most during the nine months leading up to and including the quarter in which the increase took effect (more than about 600 or 700 hours, depending on the year); people who worked less during that nine-month period (fewer than 600 or 700 hours); and people who didn’t work at all and hadn’t during several previous years, but might later work. The latter were potential “new entrants” to the ranks of the employed, in the authors’ words.

Usually, I'm not in favour of sub-group analysis, because too many researchers use it as a fishing expedition to try and find something to say, when their initial analyses show up nothing (or when the results contradict the researchers' priors). In this case, the sub-groups make some sense. Experienced workers (the first group, who worked a lot) are likely to be more productive, and so after the minimum wage increase, you'd expect employers to be more willing to keep them on. The second group is inexperienced (or at least less experienced), so you would expect them to be less affected than the first group. And the third group you would expect to be affected most of all. And indeed, that is what Jardim et al. found, as the New York Times reported:

The workers who worked the most ahead of the minimum-wage increase appeared to do the best. They saw a significant increase in their wages and only a small percentage decrease in their hours, leading to a healthy bump in overall pay — an average of $84 a month for the nine months that followed the 2016 minimum-wage increase.

The workers who worked less in the months before the minimum-wage increase saw almost no improvement in overall pay — $4 a month on average over the same period, although the result was not statistically significant. While their hourly wage increased, their hours fell substantially. (That doesn’t mean they were no better off, however. Earning roughly the same wage while working fewer hours is a trade most workers would accept.)

It’s the final group of workers — the potential new entrants who were not employed at the time of the first minimum-wage increase — that Mr. Vigdor and his colleagues believe fared the worst. They note that, at the time of the first increase, the growth rate in new workers in Seattle making less than $15 an hour flattened out and was lagging behind the growth rate in new workers making less than $15 outside Seattle’s county. This suggests that the minimum wage had priced some workers out of the labor market, according to the authors.

“For folks trying to get a job with no prior experience, it might have been worth hiring and training them when the going rate for them was $10 an hour,” Mr. Vigdor speculated, but perhaps not at $13 an hour.

However, that isn't the end of the story. The paper of course has more detail:

...workers initially employed at low wages in Seattle enjoyed significantly more rapid hourly wage growth over the quarters following both the first and second minimum wage increases in April 2015 and January 2016. While these workers experienced a modest reduction in their hours worked, on net their pretax earnings increased an average of around $10 per week....

Essentially all of the earnings increases accrue to the more experienced half of the low-wage workforce. The less experienced half saw larger proportionate decreases in hours worked, which we estimate to have fully offset their gain in wages, leaving no significant change in earnings. More experienced workers were also more likely to supplement their Seattle income by adding hours outside the city. 

So the average gain in earnings was just $10 per week, and the gains were concentrated among the more experienced workers, while less experienced workers saw no change in income. And, to top it off, the more experienced workers' gain in earnings partly arose because they were more likely to work some hours outside the area where the minimum wage applied. So the minimum wage reduced their working hours but forced many of them to work a second job. That doesn't sound like a resounding endorsement of the increased minimum wage, unless the aim is to incentivise employers to shift their workforce to more experienced (and probably more productive) workers.

[HT: Marginal Revolution, back in October]

Read more:

• The latest evidence supports negative employment effects of the minimum wage