Could $15 an hour become a reality?

31 Jul 2017

The minimum wage debate: one of the oldest, most contentious and most prominent debates in economics. Are minimum wages an effective tool in the arduous fight against poverty, or do they ruthlessly destroy jobs? Would raising the minimum wage help or hinder the lives of workers? Two recent studies focusing on minimum wage raises in Seattle reignite this eternal feud, and shed new light on the possible implications.


First of all, why should we raise minimum wages in the first place? Unsurprisingly, the policy is a direct means to boost the wages of workers and to raise their standard of living. Raising incomes may also increase aggregate demand (the total planned expenditure on goods and services in an economy) by increasing the level of consumer spending. However, minimum wages also raise the cost of employing workers and so may have a detrimental effect on employment, and disproportionately affect young and unskilled workers, who are more likely to be on the minimum wage.


In light of this dispute, it is unsurprising that Seattle's efforts to raise its minimum wage to $11 an hour in 2015, followed by subsequent rises to $13 last year and to $15 this year, have garnered a significant level of attention within the field of economics. Indeed, this experience has been the focus of two studies. So are there any lessons to be learnt from Seattle?


The first study, published in June by researchers at the University of California, made comparisons with employment in the food industry (an industry with a high proportion of employees on the minimum wage) in Seattle with that elsewhere over the period of the first two increases, and found that wages in the food industry did increase and that employment was not affected. These findings are consistent with other studies, such as this one, and this here, which also show no effect on employment.


However, another study by researchers at the University of Washington analysed data on wages earned and hours worked by individuals in all sectors during the same period, and came to very different conclusions. Whilst the first increase to $11 had a negligible effect on employment, the second increase to $13 led to a rapid decrease in both employment and hours worked below $13 an hour - enough to cause a net reduction (averaging $125 a month in 2016) in pay to low-income workers. 


Despite these alarming results, it is important to note that the study excluded employers that also have locations outside Seattle, including large franchises and multinationals such as McDonalds, in order to isolate the impact on firms in Seattle. Therefore, by excluding up to 40% of the workforce in Seattle and ignoring the impact on employers most able to afford the increase, this analysis is remarkably flawed and inconsistent with the other studies which show no effect on employment. Nevertheless, there are still important lessons to draw from these findings.


As the discrepancy between the results shows, minimum wage hikes disproportionately affect smaller firms relative to larger firms. Not only is this expected in economic theory (as smaller firms are less able to afford the rises) but this may also be beneficial in the long-run; minimum wage increases may force less productive firms out of business, but the increased level of aggregate demand resulting from rising incomes may stimulate the growth of more productive firms. Likewise this redistributive impact, in tandem with greater motivation amongst employees, a greater incentive to use efficient technology as opposed to low-cost labour, and making 'shirking' (the economic term for being lazy on the job) more risky (as you would lose a greater amount of income if fired due to being caught shirking) means that minimum wage rises increase productivity.


Moreover, the impact of rising minimum wages on employment also depends on the magnitude of the minimum wage increase. As the results of the Washington study shows, smaller increases in the minimum wage have less of an impact than larger increases.


So is the goal of $15 an hour perpetually out of reach or could it possibly become a reality? As discussed previously, most studies show no impact on employment. Therefore, in light of this, the increased standards of living amongst low-income individuals, and its productivity enhancing effects, there is a strong case for raising the minimum wage. However, considering these studies are the first to analyse the effects of minimum wages as high as $13 and the evidence is inconclusive, there are legitimate concerns that the negative effects on employment will outweigh its productivity enhancing effects if the rate is set too high.


As a result, whilst raising the federal minimum wage to $10-$12 an hour is probably feasible, a rate of $15 an hour yields a significant risk. Furthermore, as the impact of raising the minimum wage is unequal, a one-size-fits-all approach is misguided as well. Also we must not forget that this will undoubtedly exacerbate the effects of automation. A minimum wage of $15 an hour may indeed become reality, but certainly not before the robots steal your job!


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