Seattle’s recent minimum wage experiment is proving to be an apt example. The law, which passed in 2014, generally raised the minimum wage within the city to $11 per hour in 2015, then to $13 in 2016. Today, the minimum wage is $15.75 for firms larger than 500 employees, and $13.50 for smaller firms.
Just before the law was passed, a study by the Evans School of Public Policy at the University of Washington[1] found that there were about 100,000 workers in the city worked for less than $15 an hour. Only a quarter of Seattle businesses paid at least a third of their unskilled workers better than the minimum wage. While fully three-quarters of Seattle establishments had fewer than ten employees, these businesses hired only about 12% of all minimum wage workers employed in Seattle.
One way to look at this might be that the brunt of an increase in these labor costs will be placed on larger businesses that are more able to absorb the increased cost of doing business. Another way to look at it is that 75% of all Seattle businesses might not be able to absorb these increased costs and survive.
The report also mentions that the typical unskilled hourly worker in Seattle earned $9.32 an hour. It projected that an increase to $15.00 per hour would reduce the incidence of poverty in the city from 13.6% to 9.4% if employment and hours did not change. When three fourths of the businesses employing minimum-wage workers have ten or fewer employees, that is a quite a big assumption. Could all of these Mom and Pop businesses afford a 50% increase in their employee labor costs?
A 2019 study by the scholarly journal Urban Affairs Review[1] found that 56% of Seattle businesses responded to the increase in minimum wage by raising the prices they charged to consumers. The next most common response was to reduce total labor hours for their employees. Indeed, they find that layoffs were proportionately highest among franchise businesses, which are most likely to be the large-sized employers hiring the greatest number of minimum wage workers.
A 2018 study published by the National Bureau of Economic Research[2] found that when Seattle’s minimum wage was increased to $13 per hour back in 2016, total labor hours were reduced between 6 and 7 percent, while wages increased by only 3 percent. Keep in mind that total wages received by the entire minimum wage workforce is simply the product of wages earned and labor hours worked. When total labor hours decrease by a higher percentage than total wages increase, this means minimum wage workers will receive less total income. It also implies that those who were able to keep their job at the higher hourly wage will do so at the expense of others who lost their jobs entirely.
The final impact of Seattle’s minimum wage experiment has yet to be quantified. There surely will be some winners; but there will also some losers—spread across minimum wage employees, their employers and all of Seattle’s consumers. After all, there is no such thing as a free lunch.
