If you owned a business with 10 employees earning the minimum wage, and a new law forced you to raise pay by 37%, what would you do? That has been the dilemma facing business owners in Seattle, which in 2015 began a series of hikes in the city’s minimum wage.
Some of those businesses apparently decided to offset higher labor costs by hiring fewer workers, or cutting back on hours for those on the payroll, according to a new study by a team of researchers at the University of Washington. That would obviously undermine the intent of raising the minimum wage, which is supposed to help those with lower incomes. The findings are instantly controversial, given that pay rates and working conditions for those at the lower end of the pay scale have become a divisive political issue.
Bernie Sanders campaigned for president last year calling for a $15 minimum wage, echoing the “fight for 15” movement. Some states and cities in recent years have raised the minimum wage above the federal level, which is $7.25 an hour. But a dozen states still use the federal minimum, and the minimum remains below $10 per hour in most states. Conservatives argue that raising the minimum wage too much actually harms lower-income workers, since it creates an incentive for employers to reduce hours and hiring.
To some extent, the Seattle study supports the conservative view. In 2015, Seattle began rolling out a plan to hike the minimum wage from $9.47 an hour to $15 an hour, in phases scheduled to end in 2021. The phase-in dates vary for different types of firms, but the minimum wage for most firms rose to $11 per hour on April 1, 2015, then to as much as $13 an hour on January 1, 2016. The University of Washington researchers compared pay and employment levels for lower-paid workers when the wage was at $9.47 with the same data after it had risen to $13.
They found a sharp decline in hours worked and overall employment after the minimum wage hit $13. The number of hours worked fell by 9.4%, while the number of low-wage jobs fell by 6.8%, or more than 5,000 actual jobs. This happened at a time when overall employment was booming in Seattle, and pay rising. “These results suggest a fundamental rethinking of the nature of low-wage work,” the researchers concluded. “The lost income associated with the hours reductions exceeds the gain associated with the net wage increase.” In other words, some workers got a raise but on the whole, lower-income workers ended up worse off.
Working around the minimum wage hikes
Seattle employers may have reacted to the higher labor costs by automating and reducing payrolls, or by deciding they could simply do without some of the work done by their lowest-paid workers. They might also have transferred work from minimum-wage staffers to more skilled workers earning more, who could have gotten the job done faster and more efficiently. Firms with locations both inside and outside Seattle could have transferred work to nearby locations outside the city, where they were allowed to pay workers less.
Groups supporting a higher minimum wage argue the study is flawed and inaccurate. In general, the University of Washington study finds that a 3% increase in the minimum wage leads to a 1% decline in lower-income employment. But economists at the liberal-leaning Economic Policy Institute say that ratio is so far outside the mainstream findings of other research that it can’t be right. And the study’s authors acknowledge other limitations of their research. Since it relies on data gathered by the state, for instance, it doesn’t reflect what’s going on in the unreported cash economy. And it doesn’t cover contractors, who report wage and employment data differently than what the researchers had access to.
The study does, however, support the intuitive notion that if costs in one part of a business cause too much pain, the business owner will seek an adjustment. The hypothetical business with 10 full-time minimum wage workers would see payroll costs rise from $196,976 per year to $270,400 per year, as the minimum wage rises from $9.47 to $13. A 37% increase in costs in any part of a business–especially a small one with limited profit margins–is a big deal, sure to get the owners’ attention. You could pass some of that added cost onto customers, assuming they’re willing to pay higher prices and there’s no competition undercutting you. You could accept a lower profit margin, assuming you’re still breaking even or better. Or, you could crank up efforts to cut costs and seek new efficiencies. A typical business would probably try all of those things.
The debate, however, doesn‘t need to be a binary one in which raising the minimum wage is either good or bad. The more important question may be finding an optimal minimum wage that helps raise living standards with minimal and preferably no harm at all to firms or the workers it’s meant to help. One problem with the federal minimum wage is that it’s not indexed for inflation, as it should be. So instead of rising along with living costs—the way Social Security payments do, for instance–the federal minimum wage always becomes outdated, a recipe for continual battles over raising it.
This used to matter less, because there were fewer Americans trying to support a family with a minimum-wage job. But jobs that used to be done by teenagers and entry-level workers soon to move up are increasingly held by people who might have had a higher-paying manufacturing job in the 1970s or 1980s, but can’t find such work now. So the fight for, or over, $15 seems sure to continue, no matter what the studies say.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman