Aug 23

Something “Unexpected” Happened When Seattle Raised The Minimum Wage:

Seemingly no amount of empirical evidence can convince progressives that raising minimum wages to artificially elevated levels is a bad idea.  Somehow the basic idea that raising the cost of a good ultimately results in lower consumption of that good just doesn’t compute.  Though it does seem odd that progressives in states like California lean heavily on higher taxes as a way to curb, for example, fuel consumption.  Could it be that the left actually does understand the basic economics of the minimum wage debate but don’t find the math behind it to be particularly “politically expedient” in certain instances?

Despite the motives behind it, one thing is certain, the calls for a federal minimum wage hike are growing louder.  Hillary recently endorsed a federal minimum wage hike and Bernie has proposed the “Pay Workers a Living Wage Act” in the Senate that proposes mandating a federal $15 minimum wage to be phased in over just 4 years (see “Dear Hillbama, $15 Federal Minimum Wage Equals 7 Million Job Losses“).  Perhaps Bernie forgets that not everyone lives in extremely expensive cities like New York and San Francisco.

To be sure, the U.S. is not the only place where basic economics are ignored.  Sayuri Shiraiof of the Asian Development Bank said just today that “the only solution to consumption growth is wage hikes.”  We also recently reported on comments from Kozo Yamamoto, Japan’s new minister in charge of regional revitalization, who said, “I think it might be necessary to encourage a discussion throughout all ministries about a wage target policy” (see our post entiteled “Japan Proposes “Wage Controls” As Abenomics’ Desperation Measure“).

In any event, despite how futile our efforts might be, we thought we would, yet again, report the latest empirical evidence proving that minimum wage results in permanent jobs losses for the same low-skilled workers they’re intended to help.  The latest research comes from the University of Washington which researched the impact of Seattle’s recent minimum wage hike on employment in that city (as background, Seattle recently passed legislation that increased it’s minimum wage to $11 per hour on April 1, 2015, $13 on January 1, 2016 and $15 on January 1, 2017).  “Shockingly”, the University of Washington found that Seattle’s higher minimum wages “lowered employment rates of low-wage workers” (the report is attached in its entirety at the end of this post).

Yet, our best estimates find that the Seattle Minimum Wage Ordinance appears to have lowered employment rates of low-wage workers. This negative unintended consequence (which are predicted by some of the existing economic literature) is concerning and needs to be followed closely in future years, because the long-run effects are likely to be greater as businesses and workers have more time to adapt to the ordinance. Finally, we find only modest impacts on earnings. The effects of disemployment appear to be roughly offsetting the gain in hourly wage rates, leaving the earnings for the average low-wage worker unchanged. Of course, we are talking about the average result.

More specifically, we find that median wages for low-wage workers (those earning less than $11 per hour during the 2nd quarter of 2014) rose by $1.18 per hour, and we estimate that the impact of the Ordinance was to increase these workers’ median wage by $0.73 per hour. Further, while these low-wage workers increased their likelihood of being employed relative to prior years, this increase was less than in comparison regions. We estimate that the impact of the Ordinance was a 1.1 percentage point decrease in likelihood of low-wage Seattle workers remaining employed.  While these low-wage workers increased their  quarterly earnings relative to prior years, the estimated impact of the Ordinance on earnings is small and sensitive to the choice of comparison region. Finally, for those who kept their job, the Ordinance appears to have improved wages and earnings, but decreased their likelihood of being employed in Seattle relative other parts of the state of Washington.

Still not convinced?  How about a recent report from the Federal Reserve Bank of San Francisco that finds that “higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.”

How do we summarize this evidence? Many studies over the years find that higher minimum wages reduce employment of teens and low-skilled workers more generally. Recent exceptions that find no employment effects typically use a particular version of estimation methods with close geographic controls that may obscure job losses. Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss. Coupled with critiques of the methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.

Don’t trust theoretical Federal Reserve Bank studies?  How about recent hard evidence from Starbucks (which we noted here)?  One year ago, we noted that Starbucks CEO, Howard Schultz, won over progressives when he said that minimum wage “should go up across the country” and that Starbucks would “pay above the minimum wage in every state we operate.”  Sounds fantastic, right?

One year ago, when the political push to raise the minimum wage hit a crescendo, the CEO of Starbucks had some words of caution. Howard Schultz told CNN that minimum wage “should go up across the country”, however he warned that “it will be very difficult for small business in the country at a $15 level to pay those kinds of wages.” What about for his own company? “For Starbucks come January 1 we are taking wages up across the country and we will pay above the minimum wage in every state we operate. Starbucks is way above the minimum wage. I have always looked at total compensation.”

Unfortunately, it turns out that Schultz isn’t one of those “practice what you preach” kind of guys.  Per our previous note:

One year later, something “unexpected” has happened as a result of the Schultz’ all too eager push to “share” his company’s success by hiking minimum wages, namely the realization by the company’s employees (if not so much the CEO, management and certainly shareholders) that total compensation is a function of two things: hourly wages and number of hours worked.

As Reuters reports, an online petition accusing Starbucks of “extreme” cutbacks in work hours at its U.S. cafes, hurting both employee morale and customer service, has been signed by more than 9,000 people. Suddenly Starbucks’ eagerness to raise its wages becomes all too clear: after all, it would merely have to reduce work hours, to keep profitability humming.

The world’s biggest coffee chain, trying to address cooling growth at its U.S. shops, recently introduced technology that allows customers to order and pay from mobile devices. That service aims to boost sales and reduce bottlenecks in stores; it also aims to reduce work hours.

In short: Starbucks is finding itself in a sales and profit squeeze (its shares have gone nowhere for the past year), and having been such a fervent supporter of minimum wage hikes, is now far less willing to “share” its success as a company, especially if it means a stagnant stock price for the foreseeable future.

Alas, the United States is not the only place where basic economic principles apply.  The largest producer of synthetic rubber gloves for the healthcare industry, based in Malaysia, just announced plans to layoff 10% of it’s workforce to offset minimum wage hikes there as well.  Per the Nikkei Asian Review:

Hartalega Holdings, the largest producer of synthetic rubber gloves in the world, said on Tuesday that it has fired almost 600 people in a “cost management exercise”, which is close to 10% of its headcount in the first quarter.

It helped us to mitigate the cost increase due to the minimum wage hike,” Managing Director Kuan Mun Leong told reporters attending the company’s annual general meeting.

Despite the piling up mountain of evidence on the harmful “unintended consequences” of artificially high minimum wages, we suspect we already know how this story ends.  After all, it’s much easier to win elections by promising people more stuff rather than less.  And, as an added bonus, when it all goes horribly wrong it’s very easy to lame the blame at the feet of the wealthy 1%’ers who are behind all the layoffs.  Checkmate.

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