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June 6, 2014

$15 minimum wage puts Seattle in uncharted waters

SEATTLE — Vying for the title of the United States' most progressive city, Seattle this week decided to raise its minimum wage to $15 an hour. Depending on which pundit is nattering away, this means Seattle is either going to fall off the map and become a "Mad Max"-style economic wasteland or transform into an egalitarian utopia that inspires sweeping pro-labor activism nationwide. Both sides claim to know, with impressive certainty, how Seattle's bold experiment will turn out.

But that's exactly what it is: a relatively unprecedented experiment whose effects on workers, businesses and the local economy are unknowable. Anyone who claims otherwise is either lying or misguided.

Despite literally hundreds of studies focusing on the minimum wage, top economists are still uncertain about the consequences of raising it. In a survey of several dozen elite academics last year, exactly zero said they had a strong sense of what happens to the lowest-skilled workers when you require companies to pay them more.

In the absence of a reliable forecast, here's a framework for thinking through both what's likely to happen as Seattle adopts the highest minimum wage in the nation and whether other cities should follow suit.

Those opposed to raising the minimum wage typically argue that if you increase the cost of something, people will buy less of it, whether we're talking about socks or labor. That's true to a point, but the magnitude of the effect really depends on how sensitive buyers are to changes in price.

For small changes to current costs, demand for labor looks pretty inelastic. In other words, studies have found, you're not likely to see mass layoffs if the minimum wage goes up a touch. Instead, a modest minimum-wage increase is likely to be a transfer from employers to employees that will not discernibly depress low-wage employment.

 That's a good thing, if you want to improve the lives of the working poor. It's why the proposal to gradually raise the federal minimum wage to $10.10 seems like a pretty safe idea.

At some point, though, if you raise the wage floor too much, you probably do more harm than good.

Even Thomas Piketty, a strong proponent of raising the minimum wage (whose work is cited somewhat inaccurately in Seattle's new ordinance) agrees. "Obviously, raising the minimum wage cannot continue indefinitely: as the minimum wage increases, the negative effects on the level of employment eventually win out," he writes in "Capital in the Twenty-First Century."

It's hard to know, based on the evidence we have, exactly when you reach that tipping point. My own guess is that by the time you get to $15 per hour, some more marginal low-skilled positions - grocery baggers, shopping-cart retrievers, busboys - will start disappearing.

To the extent that minimum-wage jobs are "tradable" - i.e., moveable across borders - some jobs will just be shifted to where labor is cheaper. But most very-low-wage jobs are probably not tradable; they tend to be concentrated in sectors such as retail, restaurants, hotels, cleaning crews and health care, all services that are hard to perform from afar.

One other possible consequence of a $15 minimum wage is that companies will invest in more automation. Think self-checkout machines instead of cashiers. Again, not all low-skilled work can be automated, at least not as quickly as firms will want to reduce headcounts. So some of the burden of a higher minimum wage might fall on consumers, through some combination of higher prices and worse service (longer waits at the coffee shop, say).

The good news for Seattle: It's a pretty rich area with low unemployment. It seems better equipped to absorb the shock from a $15 minimum wage than a lot of other places. Which is maybe why the city feels emboldened to try its "living wage" experiment, and why lots of other cities may not be able to follow in its path.

All that said, even if Seattle's plan does improve the pay of the working poor without reducing employment, raising the minimum wage is still not necessarily the best strategy for cities, states and the nation to combat poverty and inequality in the long run. Mandating higher pay, after all, is a band-aid for much deeper structural problems in the U.S. economy. It addresses the outcomes rather than causes of inequality, which begins in utero and widens throughout childhood and early adulthood. Raising the minimum wage may be the easiest policy to sell to voters, but expanding access to high-quality education (preschool all the way through higher ed), good nutrition and safe, affordable housing are probably more potent ways to improve the lot of the United States' most disadvantaged families.

 

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