The Seattle Study: Increasing the Minimum Wage as a Way to Boost High Income Jobs

As labor market mavens all know by now, the University of Washington team chosen by the city of Seattle to evaluate its minimum wage law has issued a new report.  This one is particularly juicy since it covers the increase from $11 to $13 an hour, which moved Seattle into new territory, beyond what has been studied elsewhere.  The report makes much of its use of Washington State data which include not only numbers but also hours worked, allowing (in this respect) a more precise analysis of the effect of changes in the statutory minimum on employment.

The headline result is that the elasticity of hours worked to changes wages actually paid is in the vicinity of -300%.  The key paragraph is this:

Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs. These estimates are robust to cutoffs other than $19.  A 3.1% increase in wages in jobs that paid less than $19 coupled with a 9.4% loss in hours yields a labor demand elasticity of roughly -3.0, and this large elasticity estimate is robust to other cutoffs.

This has got the labor econ blogosphere quite excited: finally, after years of published studies that largely downplayed the labor demand disincentive effects of minimum wage laws, a report has been issued that finds immense negative effects—vastly larger in fact than those that have appeared in the past.

The backdrop to this, of course, is the economic performance of the city of Seattle itself, which has been about as strong as any city in the country.  During the period of the latest minimum wage increase Seattle has experienced essentially full employment, as reflected in an unemployment rate of about 3%.  Thus, any negative impact in one part of the city’s economy had to have been offset by positive impacts elsewhere.

And this in fact is also a finding of the Seattle minimum wage study, although its authors don’t mention it.  They restrict their sample of affected workers to those in the low wage labor market, and they employ a range of cutoffs to see how truncating the sample in different ways affect their results, but their empirical methods intrinsically apply to workers at all wage levels.  This is because their strategy for identifying employment impacts is to use various control groups, actual or synthetic, and compare employment between Seattle and these controls before and after the change in the minimum wage.  The employment impact is whatever comes out of this comparison.

Well, guess what?  The treatment-versus-control methods that generate employment losses in the lower-wage segment of the labor market are nearly exactly offset by employment gains in the higher wage segment.  This stands to reason, because Seattle as a whole is doing great: it hasn’t suffered overall from the rise in minimum wages, so dips in some parts of its economy imply bumps in others.

The calculations that make this explicit are performed by Ben Zipperer and John Schmitt of the Economic Policy Institute.  They do this for the overall city economy and also for the restaurant sector.  With its narrower focus, this second approach is especially informative.  The key paragraph here is:

The spurious results are clear in the case of the restaurant industry, as we illustrate in Figure B, where the authors’ own methodology and estimates imply that the Seattle minimum wage increase caused an incredible 20.1 percent growth in restaurant jobs paying above $19.00 per hour. While this number is not directly reported in their paper, it can be precisely inferred from their other results. To make this inference, we first note that when Jardim et al. focus on the restaurant industry, they estimate that the minimum wage increase to $13.00 caused restaurant jobs paying less than $19.00 hour to fall by an average of 10.7 percent (see their Table 9, averaging the estimates provided for the employment fall in 2016). At the same time, they find that the minimum wage caused essentially zero change in the number of all restaurant jobs, regardless of their wage rate. Because jobs under $19.00 comprised 65.4 percent of the restaurant industry prior to the first minimum wage increase (see Jardim et al.’s Table 3 for the 2014Q2–2015Q1 period), and because these jobs shrank by 10.7 percent while overall employment held steady, it follows that Jardim et al.’s estimates imply that the Seattle minimum wage increased the number of restaurant jobs paying over $19.00 per hour by about 20.1 percent.

Remember that these employment estimates are based on comparisons of Seattle to its constructed controls; measured differences are assumed to be due solely to the minimum wage hike that took place in Seattle but not in the comparitors.

One interpretation is that the Seattle study’s methodology didn’t sufficiently control for factors that have caused upward movements in wages (moving workers out of lower and into higher wage categories) in Seattle compared to other communities.  That’s what the EPI folks think.  I prefer to take the results at face value: by increasing the minimum wage we can, by some currently unknown process, cause a big upward shift in wages, not just around the minimum, but all the way up to the stratospheric reaches of the labor market.  That negative elasticity for the lower-paid is fully offset by a positive elasticity for the middle and upper class.

Magic.