Something "Unexpected" Happened When Seattle Raised The Minimum Wage

Tyler Durden's picture

Seemingly no amount of empirical evidence can convince progressives that raising minimum wages to artificially elevated levels is a bad idea.  Somehow the basic idea that raising the cost of a good ultimately results in lower consumption of that good just doesn't compute.  Though it does seem odd that progressives in states like California lean heavily on higher taxes as a way to curb, for example, fuel consumption.  Could it be that the left actually does understand the basic economics of the minimum wage debate but don't find the math behind it to be particularly "politically expedient" in certain instances?   

Despite the motives behind it, one thing is certain, the calls for a federal minimum wage hike are growing louder.  Hillary recently endorsed a federal minimum wage hike and Bernie has proposed the "Pay Workers a Living Wage Act" in the Senate that proposes mandating a federal $15 minimum wage to be phased in over just 4 years (see "Dear Hillbama, $15 Federal Minimum Wage Equals 7 Million Job Losses").  Perhaps Bernie forgets that not everyone lives in extremely expensive cities like New York and San Francisco. 

To be sure, the U.S. is not the only place where basic economics are ignored.  Sayuri Shiraiof of the Asian Development Bank said just today that "the only solution to consumption growth is wage hikes."  We also recently reported on comments from Kozo Yamamoto, Japan's new minister in charge of regional revitalization, who said, "I think it might be necessary to encourage a discussion throughout all ministries about a wage target policy" (see our post entiteled "Japan Proposes "Wage Controls" As Abenomics' Desperation Measure").

In any event, despite how futile our efforts might be, we thought we would, yet again, report the latest empirical evidence proving that minimum wage results in permanent jobs losses for the same low-skilled workers they're intended to help.  The latest research comes from the University of Washington which researched the impact of Seattle's recent minimum wage hike on employment in that city (as background, Seattle recently passed legislation that increased it's minimum wage to $11 per hour on April 1, 2015, $13 on January 1, 2016 and $15 on January 1, 2017).  "Shockingly", the University of Washington found that Seattle's higher minimum wages "lowered employment rates of low-wage workers" (the report is attached in its entirety at the end of this post).  

Yet, our best estimates find that 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.

Still not convinced?  How about a recent report from the Federal Reserve Bank of San Francisco that finds that "higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested."

How do we summarize this evidence? Many studies over the years find that higher minimum wages reduce employment of teens and low-skilled workers more generally. Recent exceptions that find no employment effects typically use a particular version of estimation methods with close geographic controls that may obscure job losses. Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss. Coupled with critiques of the methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.

Don't trust theoretical Federal Reserve Bank studies?  How about recent hard evidence from Starbucks (which we noted here)?  One year ago, we noted that Starbucks CEO, Howard Schultz, won over progressives when he said that minimum wage "should go up across the country" and that Starbucks would "pay above the minimum wage in every state we operate."  Sounds fantastic, right?

One year ago, when the political push to raise the minimum wage hit a crescendo, the CEO of Starbucks had some words of caution. Howard Schultz told CNN that minimum wage "should go up across the country", however he warned that "it will be very difficult for small business in the country at a $15 level to pay those kinds of wages." What about for his own company? "For Starbucks come January 1 we are taking wages up across the country and we will pay above the minimum wage in every state we operate. Starbucks is way above the minimum wage. I have always looked at total compensation."

Unfortunately, it turns out that Schultz isn't one of those "practice what you preach" kind of guys.  Per our previous note:

One year later, something "unexpected" has happened as a result of the Schultz' all too eager push to "share" his company's success by hiking minimum wages, namely the realization by the company's employees (if not so much the CEO, management and certainly shareholders) that total compensation is a function of two things: hourly wages and number of hours worked.

 

As Reuters reports, an online petition accusing Starbucks of "extreme" cutbacks in work hours at its U.S. cafes, hurting both employee morale and customer service, has been signed by more than 9,000 people. Suddenly Starbucks' eagerness to raise its wages becomes all too clear: after all, it would merely have to reduce work hours, to keep profitability humming.

 

The world's biggest coffee chain, trying to address cooling growth at its U.S. shops, recently introduced technology that allows customers to order and pay from mobile devices. That service aims to boost sales and reduce bottlenecks in stores; it also aims to reduce work hours.

 

In short: Starbucks is finding itself in a sales and profit squeeze (its shares have gone nowhere for the past year), and having been such a fervent supporter of minimum wage hikes, is now far less willing to "share" its success as a company, especially if it means a stagnant stock price for the foreseeable future.

Alas, the United States is not the only place where basic economic principles apply.  The largest producer of synthetic rubber gloves for the healthcare industry, based in Malaysia, just announced plans to layoff 10% of it's workforce to offset minimum wage hikes there as well.  Per the Nikkei Asian Review:

Hartalega Holdings, the largest producer of synthetic rubber gloves in the world, said on Tuesday that it has fired almost 600 people in a "cost management exercise", which is close to 10% of its headcount in the first quarter.

 

"It helped us to mitigate the cost increase due to the minimum wage hike," Managing Director Kuan Mun Leong told reporters attending the company's annual general meeting.

Despite the piling up mountain of evidence on the harmful "unintended consequences" of artificially high minimum wages, we suspect we already know how this story ends.  After all, it's much easier to win elections by promising people more stuff rather than less.  And, as an added bonus, when it all goes horribly wrong it's very easy to lame the blame at the feet of the wealthy 1%'ers who are behind all the layoffs.  Checkmate.

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gmak's picture

Silly rabbit.  They don't care about a few jobs. They want to start at the bottom and have wages domino higher all up the line in order to jump start inflation. It's a trap.

Beam Me Up Scotty's picture

Doesn't matter what the minimum wage is. Whether it's $5 an hour or $100 an hour. You WILL live a minimum wage lifestyle if you work for minimum wage. Prices adjust higher and you gain NOTHING!!

knukles's picture

So the Liberals are happy again, no?
Why do the revel in the ghettoization of wide swaths of their subjects?

Son of Loki's picture

The problem is costs of living rose in response to massive fed printing. It's a real but manufactured rise in the costs which would not have occurred if the fed let the market adjust on its own.

 

Instead of forcing more manipulation forcing a rise in wages, why not let prices revert downward to the norm? For example, let house prices correct to the norm by ending ZIRP. and so on....

nmewn's picture

Well, that would be "normal"...a reversion to the mean and they can't allow that!

The Keynesian & monetarist Fed policy is to fight the Deflation Boogeyman at every MikeyD's counter, every gas pump and protect present true believers...errr, "investors" in the ponzi's ass-ets.

I mean, how else can you grow government need? ;-)

Boris Alatovkrap's picture

Only objective of Federal Reserve and global cabal of central bankster is to support subterfuge of high velocity transactional Bank-o-Sphere™ to keep scheme of careful sheering of sheeple by sustain false confidence in Too Big Too Fail system. Inflation, deflation, this is just word salad to distract while bankster is reach into YOUR back pocket through hidden tax of dilutive effect.

… meh, but what is Boris know!?

Al Gophilia's picture

It's all in the Borscht, Boris.

RAT005's picture

As said before, I think this is only an inflation trap to justify printing more money. The US is bankrupt, they must print more to pay debt and printing is the only option. Hide the justification in higher wages. Basically reducing the number of minimum wage hours to pay down debt.

wee-weed up's picture

 

 

"Could it be that the left actually does understand the basic economics of the minimum wage debate but don't find the math behind it to be particularly "politically expedient" in certain instances?"

Socialist Libs have always believed that with utopian dreams in your heart...

You can do anything! Reality be damned!

Laws of economics, math, & gravity are mere impediments to be pushed aside for their beliefs.

Hey, just ask Maduro in Venezuela. He'll tell you.

cheka's picture

bullish on city limit or county line restaurants....like the dry counties and liquor stores sitting just outside their line

greenskeeper carl's picture

I went to college in a town like that. No liquor was allowed to be sold in the county. Unsurprisingly a huge liquor store was built on the county line, and was called the 'county line liquor store'. The end result of this law was in making people drive an extra 15 minutes to buy liquor, and push a lot of tax revenue into the neighboring county.

Infocat's picture

Maduro is the most crazy mullato  mestizo mix there possibly could be in venezuella, to let such a morn lead an entire country, it cant get worse ! http://www.truthjustice.net/

RedDwarf's picture

You can ignore reality, but not the consequences of ignoring reality.  That famous quote is from Ayn Rand, but it has a hidden caveot.  You CAN ignore the consequences for a time if you can make others take them for you.  That is what Socialists do - they are able to push the consequences of ignoring reality onto others for a great length of time until the problems becomes so monstrous in scope that it swallows everything whole.

PT's picture

Yes.  They lent a shit-ton of money to idiots who can't pay it back.  Now the choice is either to inflate away the debt or to foreclose.  If it was only one or two idiots they could foreclose, but it wasn't just one or two.  The banksters either have to inflate or admit their incompetence.  Even worse, if they admit their incompetence then they also have to down-grade the "value" of all the paper they hold - admit they are not as rich as they pretend they are.  - The "admission" comes anyway, but banksters aren't* held accountable for losses through inflation.

*Perhaps some are but compare:
"You said this piece of paper was worth $10M but it turns out it was really only worth $1M"
vs
"You said this piece of paper was worth $10M and it is worth $10M, but $10M in today's money is only worth the same as $1M x years ago."

lasvegaspersona's picture

The reason they lent the 'shit ton' was the same reason for most of the issues we are facing...the dollar is failing as a currency and there is nothing that can to even prolong its demise. When debt grows just a bit more it will become impossible for some magic number of folks  to repay. At that point they will simply buy the bad debt (you thought I was going to say the debt would fail, didn't you!) and begin the hyperinflationary process.

Death by deflation is what we should get but since the manner of currency death is optional they will print and spend and borrow until the last container comes in costing a trillion dollars and finally the dollar dies. It is far more fun for the government to do it this way.

I have seen the movie and read the book.

Beatscape's picture

Eliminate the minimum wage altogether and watch business creations soar and unemployment drop to ~2%. 

ghostfaceinvestah's picture

Better yet, reduce corporate tax rates to 15% and the economy will soar.

tricorn teacup's picture

In my pet tax reform proposal corporate income tax is zero, made up by counting dividends and the equivalent of capitol gains as ordinary income.

cheka's picture

dollar failing????? lmao!  do yo do peak oil too?  peak water?  frn outlives all of us on zh

PT's picture

They've already started buying the bad debt.  That's why some banks haven't fallen over yet.  Mind you, a lot of that bad debt is still rated AAA.

TeMpTeK's picture

Agreed... Anytime the PTB want to give unskilled labor a 100% pay increase practically overnight.. It only means 1 thing......Inflation.. They know damn well that everyone at or above minimum wage will also demand a wage increase so not to be treated like a new hire or have their standard of living diminished...The PTB must justify the inflated prices of a housing and stock market bubble at all costs.. We'll all be making more money nominally but in real terms nothing will have changed except  prices....next stop...DOW 20K...ONWARD!

TrajanOptimus's picture

Here is one thought I think a lot of you should consider....

MANY $8 an hour workers are also receiving SNAP and other government hand outs.

YOU and I are subsidizing their low wages.

So I think there should be a tiered approach based on age, $8 low skilled jobs are typically for high school and college kids. So, if a business hires an $8 an hour worker, that worker needs to be younger than 23 because they will be living at home or dorms.

If the business hires anyone over the age of 24, they have to pay the living wage because I am tired of SUBSIDIZING WALL MART EMPLOYEES WITH MY TAX DOLLARS!

Gives young people the jobs they need to teach responsibility and the rest, it gets them off government handouts and makes business responsible to pay their employees a living wage and not you and I.

golden kafir's picture

Actually they are not your tax dollars, I'm guessing they belong to the Fed...render unto Caesar what is Caesar's. AS much as i can't stand michael moore his new film, where to invade next has some pretty interesting ideas.

zvzzt's picture

yes, looking for the same old trick in Japan.... MUST.... INFLATE... DEFICITS....AWAY said the dying FiatZilla

golden kafir's picture

An interesting thing happens if one links wages and income to the price of gold and look back to say 1979, since then we have seen gold increase 10 fold but wages stay fairly stagnant. coffee used to cast 50 cents x it by 10 = 5 bucks, 6 bucks an hour min wage is 60 etc. By this fanciful logic a salmon fisherman who used to gross 100 k in 1979 made 1 mil by today's standards. you see where I'm going with this.

duo's picture

The minimum wage should be indexed to an average of the yearly price increase of an Epipen, tuition at the University of Michigan (in state), and the level of Lloyd Blankfein's salary.

Boris Alatovkrap's picture

Real minimum wage is $zero for all schmuck that is lose job because value provided < $minimum wage. Of course, this is same schmuck that is time again vote for free stuff from pandering political operative. Repeat, rinse.

Seek_Truth's picture

I've said it before and I'll say it again:

You have a gift with speaking the truth succinctly, and in addition, stating truth in a humourous way.

I always appreciate your comments.

PS- THIS is why we need moar immigrants- http://www.freshplaza.com/article/161843/Apple-picking-robots-headed-for...

Imagine how many future gubmint "workers" there will be!

PT's picture

6.6% wage increase ($0.73 out of $11) translates to 1.1% job "loss"?  I'll take them odds and do it again.  Then I'll work 1.1% less hours to make up for the lost job and still be 5.4% ahead.  (but it looks like the greedy Seattleans only worked 0.79% less hours.  Hmmm, did the price of rent go up over this time period?)

PT's picture

From pages 31 and 32.

Seattle establishments closed less frequently than in prior years.
However, this improvement was not as strong as in comparison regions.
Our best estimate of the impact of the Seattle Minimum Wage Ordinance is a 0.7 percentage point increase in the rate of business closures.
Seattle establishments opened more frequently than in prior years.
Moreover, this improvement was stronger than in comparison regions.
Our best estimate of the impact of the Seattle Minimum Wage Ordinance is a 0.9 percentage point increase in the rate of business openings.
Combining these results, we can conclude that any increase in business closures induced by the Minimum Wage Ordinance was more than offset by a corresponding increase in business openings.

So there's that too.

gmak's picture

HOw can you say that either the closings or openings were due to the minimum wage hike?  There is no evidence of this, merely that they occured during the same time frame. Closings happen for a variety of reasons that come down to the fact that (usually) they arene't making any or enough money. Minimum Wage hike would be just one factor in this. 

 

Openings are totally unrelated to minimum wage hike and happen in spite of this. Perhaps there would have been more business openings had there NOT been a minimum wage hike. One has to consider the opportunity costs - not just what happened.

 

Finally, what was the change in employment? It dropped. New businesses tend not to have as many employees as older businesses (the closing ones).  This whoe section of the report is infantile, specious, and way off the rails.

 

Bottom line is that if you raise the price on something - unless it is a necessity for life (say, air) - consumption will drop (unless you make free money available to those who wouln't otherwise buy - known as debt or credit). 

 

PT's picture

Not my report.  But if ZH wants to stand by the findings of this report then they can't ignore the bits that don't their agenda.

Personally I think all the numbers are too small to be of significance.  For example, how well does the "synthetic Seattle" model the real Seattle?  Within 1%?

But if they choose to report their parts then I choose to report my parts eg page (31 and ) 32 and "give me the 6% pay rise and I will do 1.1% less work to nett being 5.4% ahead and everyone keeps their jobs" (as I mentioned more concisely somewhere else here).

re If you raise the price then consumption will drop:
UNLESS your customers get a proportionately larger pay rise.  So many people refuse to acknowledge that when the minimum wage goes up it's not just going to the poorest worker.  It is ALSO going to the POOREST CUSTOMER.  Your WORKERS are also someone else's CUSTOMERS.  Their WORKERS are your CUSTOMERS.  Do you think you give a worker a payrise and he doesn't spend the extra?  If the minimum wage goes up then you can afford to increase your prices to match.  The customer can afford it.

"Ooooo, the universe is doubling in size every hour.  I got my tape measure out to measure it but blow me down, my tape measure had doubled in size also."

What DID NOT "double in size"?
Foreign labour.
Existing debt and the associated repayments.

So how can consumption go up if prices go up?
1.  If wages go up AND
2.  Through debt dilution.
Using the example of doubling wages AND prices, the idiot with the $600 per week mortgage and $600 per week wages, gets a $600 per week pay rise but all the other prices double to match.  So he is now $600 per week richer, though it is only really worth $300 per week in the old money, but it is still $300 pwk purchasing power that he never had before.

In the case of anywhere raising the minimum wage, I expect these things:
Minimum wage goes up.
Other workers demand proportionate increases.
Prices go up.
All EXISTING debt becomes more affordable (higher wages / prices paying down the mortgage)
Bankers want to increase interest rates, or at the very least lend more money.
Jobs go elsewhere.
But everyone wants to sell where the people are richest.

Yes, I expect employers to chase workers who live elsewhere.  I also expect employers to go looking for customers in Seattle.

Your choice - ( Rich Workers AND Rich Customers ) OR ( Poor Workers AND Poor Customers ).

----------------------

Err, but that is old skool  becoz NOW YOU DON'T HAVE TO CHOOSE!!!!
Through the miracle of globalization and cheap transport it is now possible, for a few lucky ones to have Rich Customers and Poor Workers!!!
Welcome to Geographic Wage Arbitrage!
All you gotta do is have different labour laws and put all your cheap workers in one country and all your rich customers in another country.  Ka-Ching!
But who will sell stuff to the poor workers in the poor countries?  Who cares?
Who will give high-paying jobs to the rich workers in the rich countries?  Who cares???
Isn't it a bit unfair that the poor workers in the poor countries build everything but can't afford to buy anything for themselves?
Isn't it a bit silly for the rich workers to all lose their jobs when they used to be able to consume what they produced?
If US auto workers got $22 per hour and Chinese workers get $1 per hour, shouldn't cars be 22 times cheaper (errr, minus dealer and shipping fees, of course)?

Who cares?  You're a Capitalist, not a Social Worker.  Make hay while the sun shines and when the last US worker loses his job, well never mind, there was nothing you could do about it because there is no better way!

tricorn teacup's picture

From a 6.6% increase in minimum wage I'd estimate closer to a 12-20% job loss among those currently receiving minimum wage.  A rule of thumb that a 1% increase in cost drives a 3% decrease in consumption.

PT's picture

Well, that is NOT what this particular report found.  The numbers I gave came directly from this report.  But as I said in other comments here, I'm not sure that the figures here are large enough to be significant.  Plus, your rule of thumb STILL hasn't taken into account that consumers get the same pay rise as the workers.  It's that word, MINIMUM.  How else do you think the MINIMUM wage managed to go from $1.25 to over $7 ( whatever today's figure is in your country) without already creating the destruction implied by your rule of thumb?

Antifaschistische's picture

the natural minimum wage rate would have been squeezed considerably higher if it weren't for the millions of immigrants who are willing to work for 1/2 the minimum wage.  This is a simply supply/demand issue.

Secondly, I guarantee you what will happen in Phase II & III of the great minimum wage ramp.

Phase I:   minimum wage to $15

Phase II:  Example:  Major grocery stores face massive competition from owner/operated Mexicano Mercado, Korean & Vietnameze independent grocery store operations who will pay their employees under the table any rate they agree to. (called a free market)

Phase III   Massive attacks from the liberals against independent operators who skirt minimum wage mandates...crushing the final vestige of free enterprise.

same will be true for owner operated restaurants that will kill chains on pricing.  consumers WILL switch.  which they should have done long ago anyway.

DaveA's picture

Mexicans, Koreans, and Vietnamese have spent centuries doing business under hostile governments; they always find a way. California has thousands of Mexican peddlers selling hardware out of their trucks at rock bottom prices by not paying rent, fees, insurance, sales tax, or minimum wage. In liberal states, laws are for white people.

Antifaschistische's picture

and being from California...I bought everything I could from the 'fruit stands' of central Ca.  they only took cash...and you KNEW they weren't paying taxes.  It was my way of fighting back.   Now in Houston, I miss the fruitstands but only eat at owner operated restaurants.  I am proud of our enterprising immigrants.

East Indian's picture

They are undermining your society. Tax cheating is not considered honourable by a normal white male in your country; the immigrants, whatever is the justification, will slowly erode this ethics, by their tax cheating. in a few years, tax evasion will be the new normal. At present only your rulers have caught this third world mindset by mixing with the thrid world elites; but these immigrants will slowly perpetuate third world mindset among your citizens too. It wont end pleasantly.

 

Third world mindest will bring third world lifestyle, and not the other way round.

tricorn teacup's picture

People working to support themselves are not the problem.  People mooching off the government teet, demanding benefits paid by others, and voting for more are the problem.

cheka's picture

tariff foreign labor....just like imports.  somebody get that message to trump

Infocat's picture

You say things we all know, but still, keep on doing it as you have been doing for all eternity! http://www.truthjustice.net/

HardAssets's picture

All very true Boris.

And don't you love it when they talk about personal & national 'debt'. Another scam that the banksters make up outta thin air. They 'loan' nothing real, and use that illusion to steal everything. (Its all just made up 'credit'.) The slavemasters don't need a whip, only a good lie and gullible slaves who believe them.

Boris Alatovkrap's picture

Two type of money, real money that is conversion of labor and item of value, and, money that is create by ledger entry by provision of bankster statute. Once mix of two, whole is become fungable. Once deposit your hard worked money in bank, your REAL money is fungible intermix with FAKE money, never again by any measure of accounting seperable. This is mechanism by which bankster is rob you by sophistry.

… meh, but what is Boris know?!

Boris Alatovkrap's picture

"Raise cost of good or service is reduce consumption of good or service" Surprise, is surprise, is surprise! Gosh, holy cattle! Please wait while Boris is configure facial expression of utter disbelief and shock.

There, now Boris is look confuse and surprise by yet one more unintentional consequence of dictatorial statist tyrrant and ecommunist minon.

Newspeaktogo's picture

I always give Boris an up arrow. He sounds like he's been through ALL the shit.

PT's picture

Magic rich customers appear from nowhere.  Chinaman told me so.

putaipan's picture

Surprise, is surprise, is surprise! ..... imagining boris doing his best gomer pyle impersonation.

Who-z- a- Patriot's picture

Raise minimum to $25.00 an hour and the number of jobs (business) created will sharply increase, because individuals and not the large franchises will own every (restaurant) burger and hot dog joint.

This may be the biggest the threat to corporate America.

Some of us can remember a time when the mom and pop restaurants were everywhere. Then the franchises took over, putting them out of business.

Supporting your local business owners may cost a bit more, but at least all the money stays in your local communities.

To Hell with Wal-Fart.