Wednesday, July 5, 2017

Seattle’s Minimum Wage Experiment

This paper caused a stir in the economics community in the past couple of weeks (abstract):

Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle
Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor, Hilary Wething

This paper evaluates the wage, employment, and hours effects of the first and second phase-in of the Seattle Minimum Wage Ordinance, which raised the minimum wage from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016. Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that 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. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016. Evidence attributes more modest effects to the first wage increase. We estimate an effect of zero when analyzing employment in the restaurant industry at all wage levels, comparable to many prior studies.

This is actually the second such report from this team, who have been tasked with monitoring Seattle’s minimum wage experiment. The first round of wage hikes appeared to have minimal impact on both hours worked as well as disemployment; this second round however appears to feature both. In other words, there appears to be a threshold effect (or alternatively, a non-linear response), where above a certain level, conventional textbook supply and demand analysis takes hold (higher prices = higher supply and lower demand i.e. in this case, higher unemployment).

That’s one reason why I generally support a minimum wage, but only up to a certain point. The consensus rule of thumb is that a minimum wage has little negative effects up to 40% of the median wage. Above that level, the negative impact starts outweighing the positive impact (higher labour participation; higher incomes leading to higher consumption and thus employment).

In Malaysia’s case, I’d be wary of raising the minimum wage any further until I see signs of a general upward shift in the income distribution as a whole. That hasn’t happened in the last couple of years, with the economy dealing with the downturn in commodity prices. To put it another way, the minimum wage level should be pegged to the median wage, and not to inflation.

Technical Notes

Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor, Hilary Wething, "Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle", NBER Working Paper No. 23532, June 2017

4 comments:

  1. Hi Hisham, sorry for going out of scope but I hope to hear about your view on universal basic income (UBI). I don't know where is the right platform to ask, so please allow me to drop in here.

    I know we still have a long way to go before we realistically need UBI, but I'm concerned with the lack of awareness and discussions among the high-level leaders and policymakers about its potential significance. It's essential to start THINKING about it EARLY and it will be too late to start looking at it when we desperately need one in the future (it might become a similar problem to what EPF is facing now on pensions).

    UBI is unprecedented, do you have any thoughts?

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    1. @Fung

      Discussions are actually ongoing, and not yet public (KJ for one has mentioned it). There is awareness of what's going on, but there's also the knowledge that the cost may be prohibitive and unsustainable, and we really don't know what the long term consequences might be. We for one are monitoring the various pilot projects going on right now.

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  2. Hi Hisham, just some thoughts on this. I studied in Seattle when the issue of the raising of minimum wage came up among the communities there. The talks were to raise it from $9 an hour (at that time, it was one of the highest in the states) to $15 an hour in certain Seattle cities. There was a significant backlash from the latino, black and international students communities, as they viewed it as discriminatory in the sense that employers already favoured hiring of whites, and the increased minimum wage actually benefits the whites more. The situation is further compounded by the fact that are high amounts of high skilled workers mainly in the IT industry moving to Seattle, which has indirectly raised rents and cost of living. Dr Muhamad Khalid in his book, The color of inequality, discussed in depth the inequalities between and within racial groups. Although the public sector is mainly dominated by the Malays, the average Chinese actually has higher income and wealth ( Mohamed defined wealth differently from income ) than other races in similar job levels in the private sector. And he goes on to say much of the inequality in Malaysia is now attributed to income class instead of race, with the middle class finding it much harder to move up the bracket. What are your thoughts on the racial perspective on the minimum wage policy effect on the private sector? And does Malaysia's minimum wage policy actually take into consideration that it might bring more harm to the lower income class?

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    1. @ho

      What a fascinating question! To be honest, I haven't thought about it that way, and its certainly something we should really look into.

      To be perfectly honest, we don't have enough granular information on the labour market to really understand the racial dimension of the minimum wage at all. That will change with some of the initiatives currently underway, but that still a few years away.

      I'll bring it up with Dr Muhammed though, and see what he thinks.

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