Tuesday, July 11, 2017

The Overhyped Seattle Minimum-Wage Disaster

There are glaring weakness in a new study claiming that increased pay floors hurt low-wage workers.


By Barry Ritholtz
The Bloomberg View
July 11, 2017

A study released last month by the University of Washington on Seattle’s effort to raise the minimum wage to $15 an hour has gotten a lot of attention. So what does the new study tell us?

Less than you might think.


That is the short version; the longer version follows.

Because of other obligations, I only now got around to reading the study. In a nutshell, the study said the increases hurt the low-paid workers who were supposed to benefit.

Although the University of Washington study grabbed all of the headlines, a study on Seattle’s labor market released by Institute for Research on Labor and Employment at the University of California-Berkeley a few days before UofW quietly reached the exact opposite conclusion.

Several of you have asked for my perspectives on this; today’s column will give you an overview. One major caveat is that none of the new reports have been peer reviewed; the data isn’t public. Once released, people who are much better than I am at statistical analysis will provide a better assessment of the methodology and data set. As the Seattle Times observed, once that happens, we should expect “the findings will likely be modified and the headline-grabbing claims will likely be toned down.”

As a reminder, I have my own set of my biases. I have written that low pay has been gamed by corporate employers like Wal-Mart Stores Inc. and McDonald’s Corp., whose employees have to rely of various forms of tax-payer assistance to survive. I am, of course, against subsidizing the labor costs of private industry. If the cost of greasy hamburgers and cheap Chinese imports go up if that subsidy is withdrawn, so be it. I will always take market capitalism over crony capitalism. Thus, my pro-minimum wage biases are hereby revealed.

OK, as for the University of Washington study: It found that “Seattle’s minimum wage increase reduced the total hours worked by Seattle’s low-wage workforce by about 9 percent” while raising “low-wage workers’ wages by only about 3 percent, implying that the costs of this wage hike outweighed its benefits for these workers.” The net loss to workers was an average of $125 a month.

Perhaps most noteworthy is that this study is at odds with most of the research on minimum wages. Modest, gradual increases have not been shown to reduce employment jobs or hours in any significant way.

Anytime we encounter an outlier, we should pay close attention to what might be causing the unique findings. As Michael Hiltzik observed in the Los Angeles Times, the study’s findings “are out of line with almost all other studies of the minimum wage employment effect.” That doesn’t make them suspect, exactly, but it does warrant a close examination of the methodology to see whether the researchers missed or misinterpreted something.” As Carl Sagan observed with the acronym ECREE, “extraordinary claims require extraordinary evidence.”

So far, the evidence is going the other way. Not only is the data not public, so it hasn’t yet been peer reviewed, but what we do know about the study’s methodology has been criticized for its failings. The biggest is that it excludes businesses with more than one location. In other words, no McDonald’s or other fast-food restaurant chains were included. Nor was Wal-Mart, or any of the countless other well-known retail and restaurant chains.

That is quite a significant oversight: Michael Reich of the Center on Wage and Employment Dynamics at the University of California at Berkeley analyzed the impact of the methodology used. He notes that the UofW report excludes “48 percent of Seattle’s low-paid workforce out of their study.”

This is a major flaw.

Removing all of the chain stores, he said, “raises a big red caution flag about the representativeness of their sample.” Thus, argues Reich, the interpretation reached by the study is questionable. He adds that the UofW report failed to provide any evidence that “their sample is representative of all jobs in Seattle and Washington.” Similar criticism of the study’s methodology has been leveled by others, including Ben Spielberg of Teach For America and by Ben Zipperer and John Schmitt of the Economic Policy Institute.

I also have a beef with objectivity of the study’s lead researcher, Jacob Vigdor. He has written critically about minimum-wage laws in general, including this post from 2014: “The minimum wage is a lousy anti-poverty program.” Thus, he may not be the most objective person for assessing the impact of Seattle’s minimum wage laws.

When the law was originally passed, opponents of minimum wage increases warned of devastating consequences, including restaurant closings, layoffs and other significant problems. The trouble was the evidence went the other way, and none of their forecasts have come to pass. With the predictions of disaster not having materialized, the new tract is a study with a questionable methodology that excludes almost half of Seattle’s minimum-wage workers.

Good policy requires a robust debate between honest parties on all sides of any argument. Unfortunately, we have not gotten that from opponents of minimum-wage increases. That’s too bad, as it performs a disservice to those who want to see carefully crafted policy put into effect.


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