Minimum Wage

Seattle Surprise: When You Raise Prices by Gov't Diktat, People Usually Buy Less

A new "very credible" study on $15 minimum wage validates law of supply and demand.


Rattlhed, Wikimedia

Three years ago, the city of Seattle voted to raise its minimum wage to $15 per hour, in the name of human decency and basic fairness. The minimum wage went from $9.47 to $11 per hour in 2015, and then to $13 per hour in 2016. Similar policies have been enacted or considered in countless other cities.

Critics argued that boosting wages by bureaucratic diktat rather than increases in worker productivity or market demand would lead to fewer hours and fewer jobs for low-income and low-skill workers.

Now what The Washington Post calls a "very credible" study from researchers at the University of Washington's School of Public Policy and Governance finds that the critics were right.

Specifically, the study, published as a working paper by the National Bureau of Economic Research, concludes

the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent…. The minimum wage ordinance lowered low-wage employees' earnings by an average of $125 per month in 2016.

All told, that's the equivalent of 6,317 full-time jobs eliminated because of the latest hike.

Over the past few years, a lot of people—including Sen. Bernie Sanders (I-Vt.)—have argued that labor costs are different than other costs and that elasticity of demand isn't that great when it comes to low-wage workers. But many of the studies that downplay the effect of minimum-wage hikes focus only on teenagers or fast-food workers. The University of Washington study looks at low-skilled, low-wage workers "spanning all industries and worker demographics."

The findings may surprise progressives who believe that the only limit to increasing pay for workers is the greed and selfishness of business owners, but they don't come as a surprise to people who recognize that the law of supply and demand can't be abolished by city councils. Labor is simply another cost for any business and if the price goes up suddenly and for no market-based reason, you'll tend to buy less of it. That said, the Washington researchers didn't find much of an effect when the wage went from $9.47 to $11.

The study implies something else that progressives downplay. If you want to raise the income of low-income workers, taxpayers should be willing to shoulder that burden themselves through cash transfers and other forms of welfare, rather than by trying to off-load the cost onto employers, many of whom are barely covering their costs.

It's a lot easier to demonize business owners for being cheapskates than to build a consensus around raising taxes. But the experience of Seattle—even before the final hikes to $15 an hour kick in—shows that simply trying to force businesses to pay more only hurts the very people minimum wage hikes are supposed to help.

Related: From 2016, "The Cruelty of the $15 Minimum Wage"