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Eye on the Economy: Part Two - Raising the Minimum Wage

Below is the second installment of our blog series – “Eye on the Economy: How can local governments improve economic outcomes for residents?”

Raising the minimum wage can make a real difference to a low-income household, but there is mixed evidence on whether workers are better off over time. This second part of the series will focus on increasing the minimum wage and will examine these arguments in the context of Seattle, WA.

Despite a low unemployment rate of 3.7%, approximately 45 million Americans are still living below the poverty rate, suggesting that the quantity of jobs alone is not sufficient to address poverty. Yet, the federal minimum wage has not been increased since 2009. To address wage stagnation and the growing cost of living, many cities, counties, and states are increasing minimum wage as a way to eradicate poverty within their jurisdictions. In 2014, after the United States Senate voted against moving forward on a bill to increase the minimum wage, Seattle became the first city to increase its minimum wage by local ordinance in 2015. Since then, 35 cities and counties have enacted minimum wage increases. Once all increases are phased in, more than 15 million Americans will have received pay increases.

Since Seattle was an early adopter of increasing minimum wage by local ordinance, in the section below we will analyze the effects of the increase compared to nationwide indicators and discuss how wage stagnation may start to shift as more cities and counties adopt this policy.

In Seattle, Mayor Murray was spurred to act because the middle class was eroding, and housing prices were skyrocketing. With this understanding of the problem faced by Seattle’s residents, and knowledge of the potential implications of minimum wage increase, Mayor Murray gathered a team of stakeholders including representatives from government, labor, and industry to develop specific recommendations for phasing in Seattle’s minimum wage increase.

Seattle city council voted on incrementally increasing minimum wage starting in 2015 from 9.47 to 11 dollars; the ultimate goal is $15 by 2021 for all workers and 16 dollars if employed by large employers – those with 500 or more employers. The following graph shows that poverty rate has been decreasing since 2011 and the trend continued more drastically since then, in 2015 the reduction in poverty reached 13.2%. Gross domestic product has also been increasing since the minor dip in 2009, peaking in 2015 at 7.1% growth. Employment growth has maintained the growth since the dip in 2009. The data shows that overall increasing minimum wage did not impact employment, gross domestic product, or poverty in a negative way, it is difficult to say that the positive impact observed is due to increase to minimum wage or due to recovery from recession, the least we could say however is that the market is able to adopt the changes in minimum wages and the local economy is still expanding.

Looking at Seattle’s economy at large, it seems to be recovering and booming following the national trend but increasing minimum wage affects a smaller sector of the economy as majority of workers do make above minimum wage. Taking a deeper look into how the new minimum wage is affecting the group of workers it is supposed to help, low wage workers, could yield a more insightful information about the minimum wage policy outcome. The issue of minimum wage has been gaining attention. Seattle’s  pioneering in increasing minimum wage to relatively high minimum has gained national attention, because it is an experiment that is divided between party lines. Different news outlet quote one of the two main analyses that have been carried out since the minimum wage increase was put in effect back in 2015.

One of the most quoted analysis is conducted by University of California Berkeley. The study focuses on workers who work in food preparation industry because it has a high concentration of low wage workers and the impact of the policy would affect this industry more so than other industries. The study found that on average workers in the food preparation industry did lose some hours but they made more per hour and the net effect is positive, meaning the policy had the positive intended effect with minimal negative impact on the workers. On other hand there was another study conducted by Washington University that yielded different conclusion. They have found that the net effect of the increase in minimum wage was negative: on average a low wage workers were making 125 dollars less per week.

However one of the main authors, Jacob Vigdor, of Washington University analysis did a follow up research with more up-to-date data and retracted some of the finding of the first paper. On average the net effect of the loss in hours versus the gain in hourly wage netted to a loss of 74 dollars instead of the initial finding of 125 dollars. Vigdor also found that it had a positive impact on workers who maintained their hours. The paper also recognizes some of its shortcomings, such as not including large employers who have multiple locations in and out of Seattle, which would bias their findings as the minimum wage increase policy passed applies differently depending on the size of the establishment.

Determining the effect of the increase in minimum wage is a difficult task as what has been analyzed so far has been short-term focused. The effect of the wage increase could manifest itself in different forms:

  • Increasing the disposable income of one of the most vulnerable portion of the population, low skilled workers,
  • Stimulating the local economy,
  • Decreasing the reliance on social welfare services provided by local government,
  • Uplifting the spirits of low skilled workers encouraging them to be more productive,
  • Factoring in the booming period of the local economy and nation as a whole, and
  • Other possible effects that requires further more extensive research to be determined.

As Jacob Vigdor stated, “Whatever you think about that trade-off depends on your values. We want to illuminate those trade-offs, make them as clear as possible. But we aren’t being paid the big bucks to make the final decision.” The point of the analysis is to understand the effect of policies on people’s lives and the economy, and whether it results in the desired outcome. However, such studies are being utilized as ammunition for political warfare disregarding the quality of the research, funding of the researchers, and attempts by researchers to eliminate bias from analysis, for instance, by quoting papers before they even had a chance to be peer reviewed.

As we have discussed, increasing the minimum wage is a complex issue with implications for individuals, groups, and the economy at local and national levels. Leaders like Mayor Murray and others have weighed those implications, in some cases commissioning additional research, before making the decision to increase the minimum wage in their jurisdictions. Of course, research and evidence are critical to any policy decision at any level of government. But evidence is one part of the decision. Meaningful policy change must address a real and salient challenge or problem, and must make sense based on local context. More research and evidence are certainly needed to contribute to the ongoing discussion of the direct and indirect effects of the minimum wage, especially as the economy changes and the definition of middle class shifts. As the Seattle case study has shown, leadership often means doing what’s best for the people.

For more information on using evidence and research in policy change, check out the Roadmap for Policy Change.

Read Part One: Boom or Bust

 

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