Seattle’s minimum wage increase provides a cautionary tale for other metros, but proponents not ready to concede.

The University of Washington report released yesterday has sparked considerable national attention. In our previous post we cited commentary by economists and analysts calling the research very credible and compelling. The debate continues today.

In the Wall Street Journal, Josh Zumbrun writes

Seattle’s finding suggests that while small increases in the minimum wage do no harm, at some point a minimum wage gets so high that it becomes counterproductive for the very workers the policy is meant to help.

That’s consistent with most previous research, contrary to the contentions of proponents of the wage hike. The difference between incremental increases and Seattle’s rush to $15 is significant. Zumbrun comments on a unique element of the UW research.

The new study takes advantage of a quirk in the way the state of Washington administers its unemployment insurance program. Washington is one of just four states that gather data not only on earnings of workers, but also on the number of hours employees work. That allowed the researchers to account for the hours and earnings of jobs across industries and demographic groups before and after the minimum wage changes were put in place. They compared the employment changes in Seattle with changes in the rest of Washington outside the Seattle metro area.

“These results suggest a fundamental rethinking of the nature of low-wage work,” the studies’ authors write. Previous research that had found “firms faced with labor cost increases have little option but to raise their wage bill,” they said, but the new data “suggests that low-wage labor is a more substitutable, expendable factor of production.”

He concludes,

It was only when Seattle pushed wages to new highs—they note that even adjusting for inflation, the federal minimum wage has never been as high as $13—that the ill effects became apparent, a finding that many cities contemplating higher minimum wages may consider cautionary.

Cleveland, it appears, will be among the cities ignoring the caution flag

A sizeable increase in the minimum wage in Seattle has resulted in less money, rather than more, for low-wage earners, University of Washington researchers found.

…The release of the findings coincides with Cleveland Mayor Frank Jackson announcing that he proposes to raise the minimum wage of city workers to $15 an hour.

And an organization called Raise Up Cleveland, with assistance from the Service Employees International Union, has been advocating for Cleveland to set a citywide minimum wage of $15 an hour.

.American Enterprise Institute scholar Michael A. Strain uses the new research to repurpose a 2014 warning into a 2017 “I told you so” piece

Increasing the minimum wage increases the cost of employing minimum-wage workers. Because of this, many economists worry that a higher minimum wage will translate into fewer jobs for these workers, as businesses take steps to keep their payroll costs down…

Many economists and policymakers favor modest increases from time to time in the federal minimum wage, with modestly higher state minimums as circumstances dictate, judging that the reduction in employment is worth the increase in earnings accruing to low-wage workers. In addition, many economists believe that a modest increase in the federal or state minimum wage will be associated with negligible employment losses. But Seattle’s increase is far from modest, and it applies only to one city. It is very hard to imagine that a Seattle-specific minimum wage of such generosity won’t noticeably hurt the very people its authors are trying to help…

And a city-specific $15 per hour minimum wage is simply reckless.

There will be more research as Seattle continues to implement its staged wage hike. But it’s already becoming more difficult for proponents to claim that everything is working as intended, with no negative consequences for low-wage workers and their employers.

Working Forest Action Network reports “Washington’s rural, forested areas are still lagging” in employment

The Working Forest Action Network presents new employment data documenting the struggles in rural Washington. (Click through to explore WFAN’s interactive county employment map.)

Rural Washington still lags far behind the rest of the state and the nation in terms of joblessness.

We’ve written often about the challenges facing Washington’s rural communities, most recently here and here. As we’ve said, the Opportunity Washington Priorities for Shared Prosperity is a roadmap for expanding Washington’s culture of opportunity to individuals, families, employers, and communities in every corner of the state. Critical to achieving shared prosperity is the commitment to expand economic opportunity in rural Washington.

WFAN writes,

So, as Washington’s more populous cities boom, life is still noticeably rougher in more far-flung parts of our state where unemployment is significantly higher than places like high-tech metropolitan Seattle. And recent changes to state wage and employment laws are making it harder for these areas to catch up. Every little bit of genuine economic activity helps if we’re going to avoid more spending to offset a decades-long downturn.

The reference to state wage and employment laws takes on particular resonance given yesterday’s report find Seattle’s minimum wage law reduced jobs and earnings for low-wage workers

UW economists report Seattle minimum wage increase cost low-wage workers jobs and earnings.

A new report from University of Washington economists finds that Seattle’s minimum wage ordinance has not provided the benefits proponents claimed. Their research was published today by the National Bureau of Economic Research (full report available for purchase). The abstract neatly summarizes the findings:

This paper evaluates the wage, employment, and hours effects of the first and second phase-in of the Seattle Minimum Wage Ordinance, which raised the minimum wage from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016. Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016. Evidence attributes more modest effects to the first wage increase. We estimate an effect of zero when analyzing employment in the restaurant industry at all wage levels, comparable to many prior studies. (Emphasis added.)

This doesn’t seem altogether surprising to us. Logically, the second increase would have more pronounced effects than the first. The reduction in hours worked would be the anticipated response from employers trying to manage costs. The zero effect on restaurants employment was, we’ll admit, was not what we expected.

Last week, we wrote of a study by University of California, Berkeley, economists who reported that the Seattle minimum wage law increased wages without job loss. We found that study unpersuasive. The University of Washington study, conducted by a research team hired by the city, appears to be more comprehensive and credible. And, yet, we note that full impact of the wage hike has yet to be realized; that job losses are already appearing, as found by the UW team, should concern the city’s political leadership.

The new study has already garnered considerable comment. Washington Post “Wonkblog” writer Max Ehrenfreund has an thorough discussion of the research

When Seattle officials voted three years ago to incrementally boost the city’s minimum wage up to $15 an hour, they’d hoped to improve the lives of low-income workers. Yet according to a major new study that could force economists to reassess past research on the issue, the hike has had the opposite effect…

The costs to low-wage workers in Seattle outweighed the benefits by a ratio of three to one, according to the study, conducted by a group of economists at the University of Washington who were commissioned by the city.

He reports the paper has already received positive reviews.

“This strikes me as a study that is likely to influence people,” said David Autor, an economist at the Massachusetts Institute of Technology who was not involved in the research. He called the work “very credible” and “sufficiently compelling in its design and statistical power that it can change minds.”

And there are critics, including proponents of wage hikes who cite perceived methodological shortcomings.  Among them,

“I think they underestimate hugely the wage gains, and they overestimate hugely the employment loss,” said Michael Reich, an economist at the University of California, Berkeley who was part of a group that published its own study of the minimum wage in Seattle last week.

Ehrenfreund writes,

Economists might not readily dismiss the new study as an outlier, however. The paper published Monday makes use of more detailed data than have been available in past research, drawing on state records of wages and hours for individual employees.

As a result, the paper is likely to upend a debate that has continued among economists, politicians, businesses and labor organizers for decades.

Janet I. Tu reports in the Seattle Times on the research. Regarding that $125 a month in lost wages,

“If you’re a low-skilled worker with one of those jobs, $125 a month is a sizable amount of money,” said Mark Long, a UW public-policy professor and one of the authors of the report. “It can be the difference between being able to pay your rent and not being able to pay your rent.”

The report also estimated that there are about 5,000 fewer low-wage jobs in the city than there would have been without the law.

 She also writes of the differences between the Berkeley and UW findings. 

Jacob Vigdor, a UW public policy professor and one of the authors of the UW report, stood by the team’s findings.

“When we perform the exact same analysis as the Berkeley team, we match their results, which is inconsistent with the notion that our methods create bias,” he said…

As to the substantial impact on jobs that the UW researchers found, Vigdor said: “We are concerned that it is flaws in prior studies … that have masked these responses. The fact that we find zero employment effects when using methods common in prior studies — just as those studies do — amplifies these concerns.”

He added that “Seattle’s substantial minimum-wage increase — a 37 percent rise over nine months on top of what was then the nation’s highest state minimum wage — may have induced a stronger response than the events studied in prior research.”

In FiveThirtyEight, Ben Casselman and Kathryn Casteel write,

Many economists, meanwhile, have acknowledged substantial uncertainty over the likely effects of the recent wage hikes. Most — though by no means allpast research has found that modest increases to the minimum wage have little impact on employment, and that if employers do eliminate jobs or cut back hours, those losses are dwarfed by the income gains enjoyed by the majority of workers who keep their jobs. But those studies were mostly based on minimum wages that were much lower than the ones beginning to take effect now. Even some liberal economists have expressed concern, often privately, that employers might respond differently to a minimum wage of $12 or $15, which would affect a far broader swath of workers than the part-time fast-food and retail employees who typically dominate the ranks of minimum-wage earners.

And,

Economists say that any negative effects of the minimum wage could become more evident when the economy inevitably cools. And Vigdor said that while experienced workers have probably benefitted from the higher wage, new entrants to the labor force, including teenagers, have probably lost out.“This is a ‘canary in the coal mine’ moment,” said David Autor, an MIT economist who wasn’t involved in the Seattle research…

“Nobody in their right mind would say that raising the minimum wage to $25 an hour would have no effect on employment,” Autor said. “The question is where is the point where it becomes relevant. And apparently in Seattle, it’s around $13.”

The Seattle Times editorial board warns city leaders against partisan cherry-picking of the research. Meanwhile, McDonald’s announces new digital ordering kiosks will replace cashiers in 2,500 restaurants.

We understand: The results are still tentative and methodological concerns abound. Still, we find that the results of the UW research are more consistent than not with previous minimum wage research

Lawmakers agree to compromise on graduation requirement, preserving assessments and expanding alternatives

State lawmakers have reportedly reached an agreement on graduation requirements. According to the Seattle Times,

The Washington Legislature has debated whether to place a permanent moratorium on those requirements, as House Democrats would prefer, or provide a temporary exemption — and only for the science test — as Senate Republicans have proposed.

Under the deal announced Thursday, high-school students would need to complete the language-arts and math exams as sophomores starting in 2019, according to a news release. High-school students currently take those tests in the 11th grade.

The deal also would delay the requirement that students pass a biology exam until 2021.

The News Tribune reports,

A deal struck Thursday in the Legislature would allow students in the class of 2017 and beyond to earn a high school diploma without meeting Washington’s testing requirements in biology.

Other seniors who failed standardized tests in English language arts and mathematics also could get a diploma under the new agreement. Those students would have to file an appeal to show they’re proficient in those subjects.

This is important:

The compromise would ensure the state’s testing standards for math and language arts stay in place in the future, while suspending the biology-test requirement indefinitely.

Washington state is expected to adopt a new, more comprehensive science test to replace the biology test a few years from now.

We first noted the possibility of a compromise in a blog post Tuesday

A vote on the compromise is expected next week.

Friday Roundup: Seattle Income Tax, Michigan’s Free-Tuition Guarantee, Apprenticeships

There are always a few items we’ve read during the week that deserve more attention but don’t make it into our regular posts. So we bundle them for the Friday roundup.

Here’s this week’s bundle:

The Chronicle of Higher Education: Will Michigan’s Free-Tuition Guarantee Change the Game for Low-Income Students?

Michigan’s new program, like many similar efforts, is “last dollar,” meaning it covers the tuition that remains to be paid after other grants are applied to it. As a result, a student is less likely to have grant aid left over to cover other educational expenses, such as room and board.

…But critics of the program said that to truly benefit low-income students, Michigan would need to focus on improving the accessibility of the university, not just its affordability. Sara Goldrick-Rab, a higher-education policy and sociology professor at Temple University, said that tuition is not the real barrier to enrollment at institutions like Michigan, as it can be at community colleges.

Seattle Times: Income tax would cost up to $6 million per year to administer and enforce, analysis shows

The income tax on wealthy households proposed for Seattle would cost the city $10 million to $13 million to set up and $5 million to $6 million a year to administer and enforce, according to a City Hall analysis released this week.

The City Council is considering a 2 percent tax on annual income above $250,000 for individuals and above $500,000 for married couples filing jointly.

Sen. Maria Cantwell: Cantwell, Collins Launch a Bill To Kickstart Apprenticeship

Today, U.S. Senators Maria Cantwell (D-WA) and Susan Collins (R-ME) introduced legislation to enhance America’s ability to train and educate its workers through registered apprenticeships and increase the competitiveness of our workers and businesses in the global marketplace. Apprenticeship programs are a tried and true model of workforce development, allowing workers to earn while they learn and companies to increase the skills of their workforce.

The Senators introduce their legislation as the White House is expected to unveil a series of announcements promoting apprenticeships.

White House: Presidential Executive Order Expanding Apprenticeships in America

It shall be the policy of the Federal Government to provide more affordable pathways to secure, high paying jobs by promoting apprenticeships and effective workforce development programs, while easing the regulatory burden on such programs and reducing or eliminating taxpayer support for ineffective workforce development programs.

The Wall Street Journal (Hanushek): German-Style Apprenticeships Simply Can’t be Replicated

Some American policy makers have begun to see Germany’s approach—credited with helping it navigate the 2008 recession while keeping youth unemployment in the single digits—as the magic formula. But adapting the German system for the U.S. is little more than a dream.

Over half of young Germans enter apprenticeships, which can lead to certification in more than 300 different careers. Many are blue-collar jobs ranging from construction to baking, but apprenticeships also cover white-collar fields like information technology and engineering…

The largest problem of skills in the U.S. today isn’t a shortage of young workers with specific competencies. Instead it is a need for more general cognitive skills that give workers the ability to adapt to new circumstances and new jobs. In that area, American schools are not competitive with their international competitors—and more apprenticeships won’t help.

Headed into triple overtime, lawmakers and governor hopeful that they’ll avoid government shutdown

This was expected. From the governor’s press release (video of the governor’s media availability also at link). 

With nine days remaining before the end of the fiscal year, Gov. Jay Inslee called legislators into a third session to urge them to deliver a complete two-year budget by June 30 that will fully-fund education and prevent any shutdown of state services. He also rejected the notion that a short-term 30-day budget could be considered as a stopgap.

“A government shutdown and a 30-day budget are both equally reckless, equally irresponsible tactics that fail to deal with the long-term fiscal and fiduciary consequences of not doing their job, which is to produce a two-year budget for the people of the state of Washington,” Inslee said. 

The Seattle Times reports lawmakers continue to express optimism.

Republican Senate Majority Leader Mark Schoesler of Ritzville said Wednesday afternoon that lawmakers are close to an agreement.

“We’ve always said we wanted to finish on time with a deal, and we still remain optimistic,” Schoesler said.

The governor, while clearly frustrated, seems to agree.

“The differences in spending and revenue, I believe, are small enough that I see no reason that budget negotiations go on beyond next week,” Inslee said.

The News Tribune reports similar optimism for a key House Democrat.

State Rep. Kris Lytton, D-Anacortes and the chairwoman of the House Finance Committee, said she agrees “a government shutdown is not an option.” She said she still thinks lawmakers can come up with a compromise in time.

“I mean, we’re kissing up to the deadline, but I still think we have a strong likelihood to get done,” she said. “We have to get done.”

But,

State Sen. Reuven Carlyle, D-Seattle, is less certain.

“Every hour and every day is at hyper-warp speed,” Carlyle said of this stage of budget negotiations. “Things could happen quickly, or they could crash into a black hole.”

The news stories detail what might happen in the event a deal isn’t reached. The list is long. For example, from the Seattle Times report:

Without a new state operating budget signed by June 30, much of Washington’s government would shut down July 1. On Thursday, state agencies were expected to begin sending out 32,000 temporary layoff notices to government workers…

State prisons wouldn’t accept new offenders, he said, and 50,000 seniors would lose meal-delivery service. State fish hatcheries might shut down and state campgrounds would close.

Such a shutdown “touches virtually everyone in the state of Washington, and it is totally unnecessary,” Inslee said.

We continue to hope for a good outcome. But, on occasion, the expressions of optimism put us in mind of this classic.

New report on Seattle’s minimum wage a snapshot that tells us little. A hot economy and tight jobs market hard to replicate.

Economists at the University of California, Berkeley, have published a new report on Seattle’s minimum wage. The study attempts to draw conclusions from a partially-implemented wage hike in one of the nation’s most robust local economies. A little modesty in the analysis would be appropriate. At best, their findings should be hedged as tentative, if not premature. The authors, however, show no such humility. 

The press release leads with this:

Seattle’s groundbreaking minimum wage law is raising pay for low-paid workers without hurting jobs, according to a new report released today by University of California, Berkeley economists. The report, which analyzes employment data before and after the law went into effect, finds no evidence of job loss in the city’s restaurant industry, even as pay reached $13 for workers in large companies.

“Seattle’s minimum wage law is working as intended, raising pay for low-wage workers, without negatively affecting jobs,” said Professor Michael Reich, lead author of the report. “These findings are consistent with the lion’s share of rigorous academic minimum wage research studies.”

We think that overstates things. As we reported yesterday, metro Seattle’s hot economy has created a tight local labor market; the King County unemployment rate in May was 3.1 percent. Last week, the Seattle Times reported, 

“We are in a job-seeker’s market,” said Anneliese Vance-Sherman, regional labor economist with the state Employment Security Department. “Job seekers are finding it easier to secure employment, and employers are in a position of needing to compete with other employers for qualified candidates.”

Proof: It’s not unusual these days in Seattle and the Eastside to find job postings for dishwashers starting at $14 to $15 an hour.

It seems likely that the competitive labor market, to paraphrase Reich, is working as intended, raising pay for low-wage workers. And, we’ll continue to question the assertion that the “lion’s share” of minimum wage research supports the proposition that boosting the minimum wage has no negative jobs impact. For more, we again recommend this Washington Research Council special report reviewing minimum wage research. The WRC concludes,

Minimum wages have been consistently shown to reduce employment and mobility. If the goal is poverty reduction, there are much more efficient and targeted methods…

Increases in the minimum wage are a tradeoff. Some gain, but many lose. Those who keep their jobs and their hours benefit. But those employees who lose their jobs or have their hours reduced lose out. Research shows that the negative impacts on individuals and businesses are real and long-lasting.

Reich acknowledges the challenges of investigating the effects of the minimum wage increase in one of the nation’s hottest economies. Janet I. Tu reports in the Seattle Times,  

It can be hard to separate out what impact the minimum wage law had on employment in Seattle versus the effect of Seattle’s white-hot economy and tight labor market, but “we do our best,” said Reich.

Tu reports that some small business owners and their employees have experienced negative effects.

Heidi Mann, who with her husband owns a Subway franchise near the Shoreline border, said she had seven employees, including her husband, two years ago.

 But she’s gradually had to let four of them go and is down to one full-timer, one part-timer and her husband, who’s working 60 hours a week and likely to take on more hours soon, she said.

There’s another reason to question the Berkeley conclusion.

A city-commissioned report by University of Washington researchers last year reached a more mixed conclusion. 

That study said the law indeed helped to raise the hourly pay for low-wage workers. But it also concluded that while the employment rate for such workers was better than the historical average due to the booming overall economy, the minimum-wage law itself appeared to have slightly lowered their employment rate and hours worked, relative to regional trends.

Washington Research Council analyst Emily Makings points out other limitations to the Berkeley analysis. 

As the Reich et al. paper notes, the $15 minimum wage is being phased in over time, at different speeds depending on the size of business and benefits offered. So, “Any assessment of the impact of Seattle’s minimum wage policy is complicated by this complex array of minimum wage rates.”

The paper only covers through the first quarter of 2016, when minimum wages ranged from $10.50 to $13.00. Thus, the results do not prove that there are no negative effects from a $13 minimum wage (much less a $15 one)—many employers were allowed to pay less than that. Indeed, the paper notes, “Seattle’s complex schedule . . . makes it difficult to compute an average minimum wage effect for each year, as we lack data on how many employees fall under each of the four categories.”

Read her post for a thoughtful discussion of the research. She concludes,

Overall, it’s really too early to tell what the economic impacts of Seattle’s $15 minimum wage ordinance will be. It is not fully phased in yet, and, as the UW research team wrote last year,

Economic theory predicts the long-run adjustments to a regulatory policy change are likely to be greater than short-run adjustments. Prior research shows that in the long-run, certain industries affected by the minimum wage, such as the fast food industry, have more opportunity to relocate, change the composition of their workforce, or invest in technologies that reduce their need for labor.

For what it’s worth, we note that the lead author of the Berkeley report, Michael Reich, champions minimum wage increases. In March, he wrote in the New York Daily News,

Gov. Cuomo is pressing legislators to enact a statewide phased-in $15 minimum wage. Meanwhile, a California campaign seeks to place $15 on its state’s November ballot.

Can states absorb a $15 minimum? A new comprehensive economic study says yes, they can.

He concludes,

In other words, a $15 wage will be paid for by inducing workers and businesses to operate more productively and by slight price increases spread across consumers over the entire income distribution. The adverse effects on businesses of charging slightly higher prices will be largely offset by increased sales generated by the workers who receive raises.

More productivity presumably includes reducing labor costs by operating with fewer employees, precisely the effect identified in the WRC report we cited above.

Indeed, most studies show that mini-mum wages reduce employment of less- skilled workers. The Congressional Budget Office (CBO) in 2014 estimated that raising the federal minimum wage to $10.10 would reduce employment by 500,000 jobs (CBO 2014). A 2014 study from Jeffrey Clemens and Michael Wither found that

“Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to- population ratio by 0.7 percentage point.” (Clemens and Wither 2014)

In other words, there were fewer jobs per person.

And it isn’t just that people lose their jobs, fewer jobs are created. In 2012, Jonathan Meer and Jeremy West found that for each 10 percent increase in the minimum wage, about one-sixth fewer jobs are created: “The most prominent employment effect of minimum wage laws is a decline in the hiring of new employees” (Meer and West 2012).

So, what do we conclude from the latest Berkeley report o the Seattle minimum wage? Not much, really. At best, it’s too early to draw any conclusions, as Makings writes. At worst, the premature analysis becomes another talking point in a national campaign for a $15 minimum wage. 

Metro Seattle boasts record low unemployment, as rural communities lag in recovery

Washington counties continue to experience significant differences in economic vitality as measured by unemployment rates. The May monthly employment report released by the state Employment Security Department confirms the familiar story. The metropolitan Seattle economy outperforms rural Washington in job creation. 

King County boasts an unemployment rate of 3.1 percent; unemployment rates of 5.1 percent or more are common throughout much of the rest of the state. Encouragingly, though, things are getting better in some communities. The Tri-City Herald reports

A full-scale building boom helped drive the Tri-City unemployment rate to its lowest level in recent memory for May.

The Tri-City unemployment rate fell to 5.3 percent, according to figures released Tuesday by the Washington Employment Security Department. That’s nearly 20 percent lower than a year ago and two-tenths of a point lower than in May.

 
As we wrote earlier, the hot metro economy is increasing hiring challenges for employers. Our two-fold recommendation: 
First, as we emphasize, we need to do everything possible to ensure that Washington students have the skills required to fill the 740,000 jobs expected to be opening in the next five years. Second, policymakers should intensify efforts to boost job creation outside the metro Seattle region, as many rural counties continue to struggle with high unemployment rates.
The Opportunity Washington Priorities for Shared Prosperity is a roadmap for expanding Washington’s culture of opportunity to individuals, families, employers, and communities in every corner of the state. The latest monthly employment report underscores the importance of our strategies.