In June, researchers from the University of Washington released a National Bureau of Economic Research working paper entitled “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle” (Jardim et al, 2017). It made a lot of headlines, for the claim it made that the increased minimum wage in Seattle (up to $13 this year, and planned to increase to $15 within the next 18 months) has cost low-wage workers money by reducing employment hours across the board. Essentially, Jardim and her colleagues showed rather convincingly through an in-depth econometric analysis that while wages for the average low-income worker increased per hour, their hours were cut to an extent that the losses exceeded the gains for a reduced total income. It’s an impressive case for what I argued in my first “Well, It’s Complicated” article playing out in reality.
However, not everyone is convinced. A friend of mine alerted me to an article by Rebecca Smith, J.D., of the National Employment Law Project that argues the study MUST be bullshit, because it doesn’t square with what she sees as reality. In the article, Ms. Smith makes six specific claims in her effort to rebut the study. Unfortunately for her, all these claims do is demonstrate she either doesn’t know how to read an econometric paper, or she didn’t actually read it that closely, because four are easily disproven by the paper itself, and the other two are irrelevant.
Specifically, she claimed the following:
- The paper’s findings cannot “be squared with the reality of Seattle’s economy,” because “At 2.5 percent unemployment, Seattle is very near full employment. A Seattle Times story from earlier this month reported a restaurant owner’s Facebook confession that due to the tight labor market ‘I’d give my right pinkie up for an awesome dishwasher.’ Earlier this year, Jimmy John’s advertised for delivery drivers at $20 per hour.”
- “By the UW team’s own admission, nearly 40 percent of the city’s low-wage workforce is excluded from the data: workers at multisite employers like Nordstrom, Starbucks, or even restaurants with a few locations like Dick’s.”
- “Even worse, any time a worker left a job with a single-site employer for one with a chain, that was treated as a “lost job” that was blamed on the minimum wage — and that likely happened a lot since the minimum wage was higher for those large employers.”
- “…Every time an employer raised its pay above $19 per hour — like Jimmy John’s did — it was counted not as a better job, but as a low-wage job lost as a result of the minimum wage.”
- “The truth is, low-wage workers are making real gains in Seattle’s labor market. In almost all categories of traditionally low-wage work, there are more employers in the market than at any time in the city’s history. There are more coffee shops, restaurants and hotels in Seattle than ever before. The work is getting done. And the largest (and best-paid) workforce in the history of the city is doing it.”
- “Nor can the study be reconciled with the wide body of rigorous research — including a recent study of Seattle’s restaurant industry by University of California economist Michael Reich, one of the country’s foremost minimum-wage researchers — that finds that minimum-wage-increases studies have not led to any appreciable job losses.”
Let’s look at each of these in turn.
THE CLAIM: This paper doesn’t match the reality of Seattle’s 2.5% unemployment rate, which is driving up wages regardless of the minimum wage increases due to high labor demand.
First, this isn’t an attack on the paper itself, just an expression of incredulity that demonstrates Ms. Smith apparently doesn’t understand how statistical analysis works—there are MANY factors that go into overall unemployment rates, and the minimum wage is just one of them. Thus, the paper seeks to isolate unemployment and reduced employment hours in a given sector, and the overall unemployment rate is irrelevant to the analysis.
Second, Seattle’s unemployment rate is not 2.5%, and has not been 2.5% in a long time: the Bureau of Labor Statistics lists it as 2.9% in April 2017, its lowest point in the past year, and trended back up to 3.2% by May. You don’t get to just make up numbers to refute points you don’t like.
Third, just to emphasize that this unemployment rate is not caused by the minimum wage increase, let’s compare Seattle to other cities. At 3.2% unemployment in May, Seattle was tied with five other US cities: Detroit, San Diego, Orlando, San Antonio, and Washington, D.C. All of these cities have their own minimum wages that vary between $8.10 and $13.75—but for a proper comparison, these rates have to be adjusted for cost of living. When so adjusted, the lowest paid workers were those in Orlando, making the equivalent of a worker in Seattle taking home $10.94/hour. The highest were those in San Antonio, with the equivalent of $19.39/hour at Seattle prices. For comparison, workers actually IN Seattle were making just $13/hour in May—the average for all six cities was $13.28. With such a range, can the “high” minimum wage be driving the employment rate that’s identical among all of them? These six cities all tied for 11th place in lowest unemployment rates in the nation that month. How about the best three? First place goes to Denver, with a minimum wage of $11.53 (adjusted for Seattle cost of living). Second to Nashville, at $9.72. Third to Indianapolis, at $9.93. I’d take a step back and reconsider any claim that the $13 minimum wage in Seattle is at all relevant to the overall employment rate, given that when you compare apples to apples, there is no apparent correlation at all. Instead, let’s stick to what the paper was about: the impact of total income on low-income workers, given per hour wage increases versus changes in hours worked.
The Claim: The paper excluded 40% of the city’s low-wage workforce by ignoring all multisite employers.
Quite simply, no, it did not. The paper did NOT exclude all multisite employers. It excluded SOME multisite employers. And those employers don’t account for “nearly 40% of the city’s low-wage workforce,” but rather 38% of the ENTIRE workforce across the state as a whole—no mention is made of their proportion within Seattle itself. And if Ms. Smith had read closely, she’d realize that not only does this make perfect sense, but if anything it just as likely biased the results to UNDERESTIMATING the loss in employment hours for low-wage workers.
“The data identify business entities as UI account holders. Firms with multiple locations have the option of establishing a separate account for each location, or a common account. Geographic identification in the data is at the account level. As such, we can uniquely identify business location only for single-site firms and those multi-site firms opting for separate accounts by location. We therefore exclude multi-site single-account businesses from the analysis, referring henceforth to the remaining firms as “single-site” businesses. As shown in Table 2, in Washington State as a whole, single-site businesses comprise 89% of firms and employ 62% of the entire workforce (which includes 2.7 million employees in an average quarter).
Multi-location firms may respond differently to local minimum wage laws. On the one hand, firms with establishments inside and outside of the affected jurisdiction could more easily absorb the added labor costs from their affected locations, and thus would have less incentive to respond by changing their labor demand. On the other hand, such firms would have an easier time relocating work to their existing sites outside of the affected jurisdiction, and thus might reduce labor demand more than single-location businesses. Survey evidence collected in Seattle at the time of the first minimum wage increase, and again one year later, increase suggests that multi location firms were in fact more likely to plan and implement staff reductions. Our employment results may therefore be biased towards zero.” (Jardim et al., pp 14-15).
Essentially, the nature of the data required they eliminate 11% of firms in Washington State before beginning their analysis, because there was literally no way to tell which of their sites (and therefore which of their reported employees) were located within the city of Seattle. Multi-site firms that reported employment hours by individual site were absolutely included, just not those that aggregate their employment hours across all locations. But that’s okay, because on the one hand, such firms can potentially absorb increased labor costs at their Seattle sites, but on the other they can more easily shift work to sites outside the affected area and thus reduce labor demand within Seattle in response to increased wage bills. And surveys suggest that such firms are more likely to lay off workers in Seattle than other firms—hence, excluding them from the data is just as likely to make the employment reduction estimates LOWER than they’d be if the firms were included as they are to bias the estimates positively. Ms. Smith’s objection on this point only serves to prove she went looking for things to object to, rather than reading in depth before jumping to conclusions.
The Claim: Workers leaving included firms for excluded firms was treated as job loss.
Literally no, it was not. The analysis was based on total reported employment hours and not on total worker employment. When employers lose workers to other firms, they don’t change their labor demand. Either other workers get more hours or someone new is hired to cover the lost worker’s hours. If hours DO decrease when a worker leaves, that means the employer has reduced its labor demand and sees no need to replace those hours. In which case, it IS “job loss” in the sense of reduced total employment hours.
The Claim: When employers raised wages above $19/hour, it was treated as job loss.
Again, literally no, it was not. Not only does the paper have an extensive three-page section addressing why and how they chose the primary analysis threshold of $19/hour, they also discuss in their results section how they checked their results against other thresholds up to $25/hour. In short, a lot of previous research has conclusively shown that increasing minimum wages has a cascading effect up the wage chain: not only are minimum wage workers directly affected by it, but also workers who make above minimum wage—but the results decrease the further the wage level gets from the minimum. Jardim et al did a lot of in-depth analysis to determine the most appropriate level to cut off their workforce sector of interest, and determined the cascading effects became negligible at around $18/hour—and they chose $19/hour to be conservative in case their estimates were incorrect. And they STILL compared their results to thresholds ranging from $11/hour to $25/hour and proved the effects of the $13 minimum wage were statistically significant regardless of the chosen threshold.
The Claim: Low-wage workers are making gains, because in almost all categories of traditionally low-wage work, there are more employers in the market than at any time in the city’s history.
Simply irrelevant. Number of employers has zero effect on number of hours worked for each worker. Again, the analysis was based on total labor demand for low-wage workers as expressed in total employment hours across all sectors. The number of firms makes no difference to how many labor hours each firm is demanding per worker.
The Claim: This study cannot be reconciled with the body of previous research, including Reich’s recent study of restaurant labor in Seattle, that indicates minimum wage increases don’t lead to job losses.
There are two parts of my response to this. First, that body of previous research is MUCH more divided than Ms. Smith seems to believe, but that’s to be expected from someone who so demonstrably cherry-picks statements to support her point. While one school of thought, led by researchers like Card and Krueger (the so-called New Minimum Wage Theorists), believes their research supports Ms. Smith’s argument, their claims have consistently been rebutted on methodological grounds by other researchers like Wascher and Neumark. Over 70% of economists looking at the conflicting evidence have come down in support of the hypothesis that minimum wage increases lead to job loss among minimum wage workers, as cited by Mankiw in Principles of Economics. I discuss both points of view more extensively in “Well, It’s Complicated #1.”
Second, the paper has a two and a half page section entitled “Reconciling these estimates with prior work,” where the authors discuss this issue quite in depth. Including pointing out that when they limit their analysis to those methods used by previous researchers, their results are consistent with those researchers’ results, and they, too, support Reich’s conclusions in regards to the restaurant industry specifically. In short, yes, this study ABSOLUTELY can be reconciled with the body of previous research. That body just doesn’t say what Ms. Smith apparently believes it does.
So where does that leave us? Quite simply, Ms. Smith is wrong. Absolutely none of her criticisms of the paper hold water. Actually, this is one of the most impressive econometric studies I’ve ever read—it even uses the Synthetic Controls methodology that I’ve previously criticized (see my article, “Lies, Damn Lies, and Statistics”), but it uses it in the intended limited and narrowly-focused manner in which it provides useful results. And it does an excellent job of demonstrating that despite the booming Seattle economy, the rapid increase in the city’s minimum wage has hurt the very employees it intended to help, reducing their total monthly income by an average of 6.6%.
Original paper can be found here: http://www.nber.org/papers/w23532