In 2014, Seattle decided to raise the minimum wage to $15 per hour, with a full phase-in scheduled by 2021.Two studies published this month purported to shed light on the effects of Seattle’s increase in the minimum wage. The first study published claimed that the minimum wage increase didn’t lead to a loss in jobs. The second, more recent one, showed that the minimum wage hike led to a loss in jobs and caused economic harm to lower-income workers. So which study is right?
Empiricism vs. Theory
The first thing to remember about any study in the social sciences is that the real world is not a laboratory where inputs can be isolated and conclusions drawn based on the results of experiments. There are so many variables that cloud what happens in the real world that economic theory often provides more insights than observed results.
In the case of minimum wage increases, what is happening is government mandating an increase in the price of labor. Labor is a good just like any other. And what happens when the price of a good increases? The quantity of the good demanded decreases. So when the price of labor is increased, employers will necessarily demand less labor. That means they will hire fewer people, or lay off more employees, or make existing employees work harder.
That effect is, of course, ceteris paribus – all other things being equal. If the minimum wage is increased but business also increases, or some other regulations are eased, then businesses may not lay off as many workers as they otherwise might. And any studies that look at the issue might then conclude that the minimum wage had no effect, when in reality the minimum wage hike was being counteracted by other factors.
What Do Minimum Wages Do?
The second study, which found that the minimum wage hike had negatively affected low-income workers in Seattle, illustrates the expected results of minimum wages. Those workers who were previously making less than the minimum wage and who remain employed will see a boost in income. But many other workers will lose their jobs, and young people trying to enter the job market won’t get hired, so overall the average “benefit” is actually negative.
A $15 minimum wage doesn’t just tell employers: “You must pay your employees at least $15 an hour.” It also tells potential employees: “You may not offer to work for less than $15 an hour.” Younger and less-skilled employees are those most likely to be negatively affected by minimum wages, while older and higher-skilled employees will benefit since there is less competition from lower-skilled employees undercutting them on price. That’s why you’ll always see unions at the forefront of efforts to raise minimum wages – they want to keep lower-priced labor from competing against them.
Will the results of Seattle’s experiments convince proponents of minimum wage increases that raising minimum wages is harmful and counterproductive? For those most committed to the fight, probably not. Many of the arguments in favor of the minimum wage rely on emotion rather than reason. And many people who support the minimum wage believe that when the government orders something to happen then it will or should happen, and any negative consequences should be similarly countered with additional legislation. A worldview that doesn’t understand economics and relies on government force to get its way can’t be convinced by facts and logic. But maybe enough people will begin to realize the destructiveness of minimum wages and keep any more cities from falling into the same trap as Seattle.