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Unexpected Consequence of Higher Minimum Wage


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Funny thing happened in Washington after the city of Seattle raised the minimum wage (which went to US$13/hr in 2016 and will rise to US$15/hr in 2017):

https://www.scribd.com/book/321992619/Seattle-Minimum-Wage-Final-Report

the Seattle Minimum Wage Ordinance appears to have lowered employment rates of low-wage workers. This negative unintended consequence (which are predicted by some of the existing economic literature) is concerning and needs to be followed closely in future years, because the long-run effects are likely to be greater as businesses and workers have more time to adapt to the ordinance. Finally, we find only modest impacts on earnings. The effects of disemployment appear to be roughly offsetting the gain in hourly wage rates, leaving the earnings for the average low-wage worker unchanged. Of course, we are talking about the average result.

More specifically, we find that median wages for low-wage workers (those earning less than $11 per hour during the 2nd quarter of 2014) rose by $1.18 per hour, and we estimate that the impact of the Ordinance was to increase these workers’ median wage by $0.73 per hour. Further, while these low-wage workers increased their likelihood of being employed relative to prior years, this increase was less than in comparison regions. We estimate that the impact of the Ordinance was a 1.1 percentage point decrease in likelihood of low-wage Seattle workers remaining employed. While these low-wage workers increased their quarterly earnings relative to prior years, the estimated impact of the Ordinance on earnings is small and sensitive to the choice of comparison region. Finally, for those who kept their job, the Ordinance appears to have improved wages and earnings, but decreased their likelihood of being employed in Seattle relative other parts of the state of Washington.

Interesting. As expected, higher minimum wages increase unemployment.

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First of all, nobody should take seriously anyone who publishes an article in Comic Sans.

​Second, short-run economics is meaningless here. In the long term, businesses have more customers when employees have more money. That's a truism as old as industrial labour.

​Finally, the report doesn't say what you seem to think it says. It says employment actually increased not only in Seattle but in neighbouring communities. It didn't increase as much​ in Seattle. Why do you suppose employment increased in neighbouring communities? Do you think someone who works in Seattle keeps all of their money there? Of course not. They spend it there, as well as the neighbouring communities where they live and play.

I find these authors' interpretation to be sorely lacking.

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In the long term, businesses have more customers when employees have more money. That's a truism as old as industrial labour.

It is also BS. The golden rule of economics is higher prices mean lower demand. Raise minimum wages which increases prices and demand will go down. The idea that paying a subset of workers more is going to have an appreciable impact on demand for non-essential services which they still can't afford is delusional thinking.

If the Seattle data says overall employment has increase it is extremely unlikely that it has anything to do with the minimum wage given the lag times for such an effect to be noticed. It is more likely the result of the relatively buoyant Seattle economy that was able to shrug off the negative impact on demand created by higher prices.

Edited by TimG
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It is also BS. The golden rule of economics is higher prices mean lower demand. Raise minimum wages which increases prices and demand will go down. The idea that paying a subset of workers more is going to have an appreciable impact on demand for non-essential services which they still can't afford is delusional thinking.

If the Seattle data says overall employment has increase it is extremely unlikely that it has anything to do with the minimum wage given the lag times for such an effect to be noticed. It is more likely the result of the relatively buoyant Seattle economy that was able to shrug off the negative impact on demand created by higher prices.

Higher minimum wages also lead to lower training costs through improved employee retention, offsetting some potential price increases. The minor price effect also doesn't even come close to negating the increase in income. Since, those earning minimum wage are generally not meeting all of their needs, nearly all of the new income is returned to the economy.

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Higher minimum wages also lead to lower training costs through improved employee retention

Again, a nonsense claim because 'employee retention' implies that good employees were constantly leaving for better opportunities. If these 'better opportunities' existed then there would be no need to raise the minimum. What is really happening is bad employees are leaving because they are not a good fit for the job which is good for employers.

The minor price effect also doesn't even come close to negating the increase in income.

Minor price effect? More wishful thinking. Increasing wages by 40% in wage intensive industries will have a huge impact on prices (at least 20% depending on the business).

The 'income effect' on demand is negligible since minimum wage earners are a small fraction of the customers for most businesses. Furthermore, the Seattle study showed that the total income for workers is unchanged even as the wages increase (reflect the fact that businesses cut back on hours to save costs). This completely eliminates any hypothetical effect on demand.

I can understand the ideological justifications for increasing minimum wage. If you want to use those justifications then use them. Just don't waste time with bogus economic arguments trotted out to rationalize something you want for ideological reasons.

Edited by TimG
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Furthermore, the Seattle study showed that the total income for workers is unchanged even as the wages increase (reflect the fact that businesses cut back on hours to save costs). This completely eliminates any hypothetical effect on demand.

Your brackets indicate your own supposition and as you've done before you're ignoring an intended effect that's been noted in arguments for guaranteed incomes. Many working poor work at 2 or more jobs to make ends meet and if a raise allows them to achieve that with less hours many will choose to invest that dividend into their quality of life.

Overworked people who work less will open up opportunities for underemployed people to work more.

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if a raise allows them to achieve that with less hours many will choose to invest that dividend into their quality of life.

I find it implausible that minimum wage worker worker would choose to cut back on hours to the point were they end up with the same take home pay. The study looked at aggregate totals so people with multiple jobs are taken into account. Edited by TimG
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I find it implausible that minimum wage worker worker would choose to cut back on hours to the point were they end up with the same take home pay.

I don't. I have a co-worker whose recent raise allowed her to quit her 2nd job, spend less on child care and enjoy the extra time she had with her son.

I'm pretty sure she spent her child care savings on other necessities.

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It is also BS. The golden rule of economics is higher prices mean lower demand.

This is an overly simplistic freshman economics course level of understanding that does not account for the complexities of these systems, particularly when it comes to employment. You're ignoring things like elasticity and utility, and perhaps most importantly the fact that there isn't perfect competition here. You keep bringing up this "golden rule" of supply and demand but the relationship between those two things is far more complicated than A + B = C. Since you don't account for confounding influences, you can't see why someone would take less hour when they earn more.

​If you want it overly simplified, look at it this way.

​If people get paid more, they demand more from local businesses because they have more money to spend. The increase in demand for goods and services forces businesses to hire more people to deliver those goods and services.

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account for the complexities of these systems

I am aware of the complex interactions that can mitigate the basic rules of economics, however, I see no reason to believe that they would apply in this case given:

1) Minimum wage earners are a small fraction of the population and one cannot rationally expect a large increase in aggregate demand due to a large increase in their wages.

2) Many minimum wage earners depend on discretionary spending (fast food, retail) so an increase in costs will impact demand for those services from people who do not make minimum wage.

3) The increase in prices affects minimum wage earners too so they may make more but can buy less.

In short, your appeal to complexity comes across as simply an excuse to ignore the inevitable negative economic consequences of mandating wage increases without any matching improvement in productivity.

Edited by TimG
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I find it implausible that minimum wage worker worker would choose to cut back on hours to the point were they end up with the same take home pay.

Perhaps you find it immoral in some way.

Oliver Twists asking if he could please have some more comes to mind.

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Except you're ignoring the results of the study cited in the OP.

You obviously did not read the OP beyond the talking points.

In sum, Seattles experience shows that the Citys low-wage workers did relatively well after the minimum wage increased, but largely because of the strong regional economy. Seattles low wage workers would have experienced almost equally positive trends if the minimum wage had not increased.

IOW, the OP claims that any increase in jobs would have occurred without the increase so you certainly can't attribute that to increase. It just means that the harms were less because of the general state of the Seattle economy as determined by the welfare of the non-minimum wage workers who make up the majority of the population.

The OP also points that there were measurable negative impacts on employment rates and hours worked with the zone affected by the increase which is consistent with economic theory.

Edited by TimG
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Except you're ignoring the results of the study cited in the OP. Jobs increased in both Seattle and neighbouring communities. So how do you reconcile that with what you're arguing?

The point the study was making was that jobs increased both in the area where the minimum wage increased (the city of Seattle) and areas around it where the minimum wage did not increase. However, the rate of increase was higher in surrounding areas. Based on this, they extrapolate that had the minimum wage NOT been increased in Seattle, then it would have experienced job growth more comparable to the surrounding areas. So the study's conclusions support TimG's point. But of course, the extrapolation is pretty weak since there are many other factors that make the Seattle city area which includes the urban core very different from surrounding suburban areas.

Regardless, Seattle is likely a bad test case to extrapolate to the rest of the country or to other countries since it is currently undergoing absolutely explosive economic growth, a construction boom, house price increases reminiscent of Vancouver, a rapid demographic shift in many of its neighborhoods, and very rapid population growth. This was ongoing both before and after the minimum wage changes.

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Like I said, they can't control for higher wage earners spending their money outside the core and thereby increasing employment outside of the city according to the axiom I keep repeating. If anything, I would argue that the results show that not only do jobs increase where the wages increase but it also spills over into neighbouring communities.

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If anything, I would argue that the results show that not only do jobs increase where the wages increase but it also spills over into neighbouring communities.

It says nothing remotely close to that statement. It said the economy was growing and minimum wage earners benefited no matter what, however, those subject to the high rate saw the number of jobs reduced and their hours cut back when compared to those who had the lower wage levels. Edited by TimG
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It says nothing remotely close to that statement. It said the economy was growing and minimum wage earners benefited no matter what, however, those subject to the high rate saw the number of jobs reduced and their hours cut back when compared to those who had the lower wage levels.

Compare that to areas with "right to work" legislation and you quickly find out where the real job losses actually are.

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​If people get paid more, they demand more from local businesses because they have more money to spend. The increase in demand for goods and services forces businesses to hire more people to deliver those goods and services.

You are missing a fairly obvious point. The extra money required to boost the minimum wage has to come from somewhere. That same extra money that someone else was going to stimulate the economy with, but now is not. You're just playing a shell game.

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You are missing a fairly obvious point. The extra money required to boost the minimum wage has to come from somewhere. That same extra money that someone else was going to stimulate the economy with, but now is not. You're just playing a shell game.

Extra wealth to those in the top brackets, like upper bracket tax cuts, is rarely returned to the local economy. Those with 5,000 times the wealth of the poorer classes simply don't buy 5,000 times more coffees or pairs of pants at local shops. They will most likely reinvest their additional wealth but in ways that do not benefit the local economy. The lower classes are not meeting all of their needs, thus almost all of the additional wealth earned is returned to the local economy for groceries and clothing.

In the Seattle example, roughly 100,000 workers now earn a living wage with many full time minimum wager earners grossing $6,000 more per year. Prices at minimum wage dominated establishments like fast food restaurants have gone up marginally and almost no price increases have been noted at grocery chains. The wage increase impacts prices by 1% per year on average, which is far less than inflation and rent increases faced by Seattle business owners. http://bit.ly/1Qk7kgq http://www.kiro7.com/news/fast-food-prices-rise/40021992

If full time service employees require food banks/stamps and social programs to get by then we are just publicly subsidizing corporate profits. One penny on the dollar is an imperceptible price increase to most, yet now thousands of people are contributing more to the local economy and requiring less government assistance.

Edited by Guest
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