In the latest EconTalk, both host Russ Roberts and economist interviewee Jacob Vigdor do a great job of discussing Vigdor’s and his colleagues’ 2016 study of Seattle’s large increase in the minimum wage. Russ asks pretty much all the right questions at all the right points. I highly recommend it.
A few highlights follow.
First, the humorous part about different expectations on the cost of the study:
Jacob Vigdor: And it turns out that the City of Seattle had put out a request for proposals. Because they were commissioning a study of the impact of the minimum wage. And so, I joined a group here at the U. of Washington that was putting a bid together for that contract.
Russ Roberts: And, you won that bid, presumably.
Jacob Vigdor: Well, we were the only bidder. It was kind of a funny story. Because, you know, usually a request for proposals will say things like, ‘Well, here’s the budget that we’re looking for.’ Or, ‘Here’s the [?] we have to award.’ There was no such information in Seattle’s RFP [Request for Proposal]. So, we looked at the scope of work that the City had put into this Request for Proposals. And we just sort of penciled out how much that would cost to get all that work done. And we put together a bid for $1.7 million dollars. And then, right after we submitted the bid, the Mayor put out his proposed budget. And in the Mayor’s budget we saw that there was a line item for this study for $100,000.
The main finding–on hours worked:
Russ Roberts: And, so tell us what you found.
Jacob Vigdor: So, when we did this methodology, what we found was, first of all, the minimum wage did appear to raise wages. Which is–sort of a–that’s what we expected to see. But when we looked at employment, we actually saw a reduction. And the reduction was actually a little bit larger in magnitude when we looked at hours worked rather than just simple head-count measures of employment. So, basically, what we’re coming up with and the revised estimates that we’ve put together suggest that wages went up about 3%, as a result of the minimum wage increase; but then hours were down about 6 or 7%.
Whose hours fell?
Jacob Vigdor: So, when we look at the low-wage labor market overall, what we’re picking up is the amount of money paid out in the low-wage labor market declined. But that’s, of course, lumping together. When we looked more specifically at the trajectories of individual workers with differing levels of experience, we found that the more experienced workers were coming out ahead. On average they were taking home–not necessarily taking home, but their paychecks were reflecting an extra about $20 a week. The less experienced workers who at least had a job to start with, were more or less breaking even: their increase in hourly wages was being pretty much offset by a reduction in hours. And then, the big losses in terms of much lower pay would be amongst the workers who hadn’t even entered the labor market yet when the minimum wage started to increase, because they were finding it harder to find any work at all.
Russ Roberts: Help me think about those people. So, I’m a–maybe I’ve been out of the labor force, or maybe I’ve just turned, I’ve just left school. And I’m looking for work; I don’t have a lot of skills, and I’m trying to get a job as a dishwasher or a gardener–helping somebody with gardening or contracting. And, you’re saying I’m not going to find the work to start with? Is that the issue?
Jacob Vigdor: Yeah. So, there are lots of job openings in Seattle. But the general pattern is that employers are emphasizing experience. And, you know, as economists we tend to talk about skills. But the Number 1 skill that you can have as a dishwasher is experience being a dishwasher. So, typically, if you are a dishwasher in a restaurant kitchen, you are going to be using equipment; and if you have some familiarity with that equipment already, you don’t need to be trained. You can be productive starting from Day 1 on the job. And that’s really what employers are emphasizing. They are really interested in having people who have familiarity with the job already, who do not need to be trained on the job. Because on-the-job training is an investment, and at $15 an hour that investment doesn’t make sense from the business owner’s perspective.
Substitution on many margins:
Jacob Vigdor: Yeah. One of the most interesting conversations that I had regarding the restaurant industry: I got a call, shortly after I signed on to this study, from a person who was the CEO [Chief Executive Officer] of the Washington Restaurant Association. He wanted to meet, and he wanted to just kind of bend my ear and get my perspective about–what perspective we were taking. Basically, he just wanted to see, ‘Okay, are you guys just sort of hook, line, and sinker going to write a study where the conclusions are foregone conclusions? Or are you really doing this on the level?’ And so the interesting part of that conversation was, I sat down with this CEO of the Washington Restaurant Association, and the first thing he said to me is, ‘We’re going to be fine. Our members of this Association–the minimum wage, it’s not going to break them.’ And the reason why, he said, is because, ‘there are so many strategies that we have to basically reduce our labor.’
Russ Roberts: Right.
Jacob Vigdor: And he proceeded to tick off about 8 different specific business strategies that a restaurant owner can use to cut back on their use of low-wage labor. And these include things like, instead of hiring a prep cook to chop vegetables for you, you just order chopped vegetables. And, so, that eliminates that job from your kitchen.
Russ Roberts: And, you order them from an area that doesn’t have a $13 or $15 minimum wage, so they are cheaper than they would be if you did it yourself.
Jacob Vigdor: Yes. Those vegetables might be chopped in Mexico, for example. Another thing that he mentioned, and this is something that we see quite a bit in Seattle–so, there’s a move away from table-service restaurants to order-at-the-counter type restaurants. So, if you are imagining a restaurant where you go, you sit down, someone comes to take your order–that person is on the clock; you have someone delivering your food–that person is on the clock; you have someone bussing your table–their hours are on the clock. The new style of restaurant in Seattle, and actually one of the closest restaurants to my house did this transition over the past couple of years. You go; you order at the counter. They call out your number or your name when the food is ready, so you are the one transporting the food to your table. You are the one bussing your table when you are done. And so basically what had been tasks accomplished by low-wage workers on the clock are now being accomplished by an unpaid person–which is the customer. So, little tweaks like this–that’s how restaurants have coped. And it’s absolutely true that the restaurant industry in Seattle is, by and large, doing fine. There are some closings; but there are quite a number of openings as well. Our efforts to try to understand whether the minimum wage has impacted the business opening and closing rate have generally found that we don’t find any effect. But what we do find is that the patterns of openings and closings are steering the city towards less labor intensive restaurants. So, we’re moving away from full service. We’re moving towards order-at-the counter and other forms of serving people food that involves fewer labor hours.
The competing Berkeley study:
Jacob Vigdor: There are just as many low-wage workers in the health care industry as there are in the restaurant industry. The difference is that–you’re right. It’s a higher proportion of restaurant workers are low-wage workers. Because in the health care industry you also have doctors and nurses and people who–you’ve also got custodial staff, cafeteria staff. You’ve got all sorts of employees in the health care sector that are low paid. Anyway, I think that the Berkeley study of the restaurant industry–it’s reliable as a study of the restaurant industry, because they are finding the same result that we found when we did our analysis of restaurants in Seattle. Namely that, overall restaurant employment shows no negative impact. There are just as many jobs in Seattle restaurants as we would have expected without the minimum wage increase. Now, there’s an asterisk there, which is, we’re talking about all jobs in the restaurant industry. Not only low-wage jobs. So, the Berkeley study used a data set that didn’t give them the capacity to study low-wage workers specifically. Our data set allows us to do that. And, what we found is that if you look at low-wage employment in the restaurant industry, rather than overall employment, and if you look specifically at hours instead of number of jobs, you do find these negative impacts. And so, I think that one of the things we’re picking up from our data analysis is that there are quite a few people in the low-wage labor market in Seattle who have kept their jobs. And so, if you are just counting up the number of jobs, it might look like it hasn’t changed very much. But the difference is that they are seeing reductions in their hours. So, a reduction in hours is something that Berkeley’s study can’t [find].
Why the long-run effect on low-wage jobs could be even more devastating:
Jacob Vigdor: So, once a restaurant in Seattle figures out, ‘Hey, I can save on labor costs by just having my customers bus their own dishes,’ then, if that business practice filters out into other parts of the country, then our control groups start to see some reduction in employment as well. And this is actually the story–I mentioned a little while ago the conversation I had with the CEO of the Washington Restaurant Association. And this was his story. His story was, ‘Minimum wage increases force businesses to think up new ways to economize on labor. Once they’ve thought them up, those business practices filter out into other parts of the country.’ And so, it could very well be that in the long run, the treatment-versus-control difference in something like low-wage employment could actually dissipate. But the reason for the dissipation is that in the long run, we are going to see across the board the number of opportunity for low-wage workers declines, because all the businesses have adopted these changed practices to cut down on their use of low-wage labor.
Political operative doesn’t care if the long run comes quickly:
Jacob Vigdor: I had a political operative from the Seattle Mayor’s office come visit me a couple of years ago. This particular staffer from the Mayor was wondering if I would be willing to sort of go out in public and advocate for a higher minimum wage. And, I responded by saying, ‘Look, that’s not my job. I’m not an advocate. I’m a researcher.’ And I mentioned to him that our research was actually showing that there were some potentially adverse impacts of Seattle’s minimum wage. And he responded to me by saying, ‘Well, in the long run, aren’t these jobs going to go away anyway?’ And so, this is coming from someone whose job description is to be a minimum wage advocate.
Immigration from Mexico:
Jacob Vigdor: Yes. Well, the good news about immigration is that even as immigration has declined, I mean, one of the, the demography is a huge factor in determining immigration flows. And America’s era of rapid immigration from Mexico coincided with demographic patterns in Mexico that involved high birth rates, low mortality rates, and big population growth. The birth rates in Mexico have declined to the point where their population is stable. And so I don’t think that we are ever going to see the kind of immigration from Mexico that we had in this country prior to about 2007.
READER COMMENTS
Jon Murphy
Mar 9 2019 at 12:50pm
Good stuff indeed. In particular, I enjoyed the conversation on the many margins people can adjust. That’s something I always try to emphasize to my students (even if I sometimes forget about it myself).
Benjamin Cole
Mar 9 2019 at 11:15pm
Both the Vigdor study, and the Berkeley study, strike me as seriously deficient, as they do not take into account Seattle’s rapidly changing rent picture, for both commercial and residential space.
Many Seattle storefronts and businesses in recent years have face triple rent increases when older leases expired. So the low-end businesses are getting pushed out of Seattle.
The story on residential rents is well-knwon, and they have also exploded in the last 20 years.
In short, Seattle went from being a middle-class city with room for low-wage business and people, into a being a high-end city. Minimum wage businesses and people are getting shoved to the metropolitan outskirts.
It remains a mystery why US economists and macroeconomists (including libertarians) have such a resolute blind spot to property zoning, which is artificially propelling Seattle land values north (and up and down the West Coast as well). The Seattle labor market is seriously distorted by the rapidly evolving rent picture.
Sure, let’s get rid off the minimum wage—as soon as we ban property zoning, and the routine criminalization of push-cart vending.
As for Vigdor’s study, it may explain something or may not. The Berkeley study too. The two studies strike me as besides the point.
But they are useful for bias confirmation!
Jon Murphy
Mar 10 2019 at 9:00am
Not sure about Berkeley, but the study discussed here does take into account rents (see Appendix B). The diff-in-diff strategy takes into account fixed effects like that.
I imagine Berkeley’s study would as well, unless they used a method where FE are redundant. I don’t recall that study off hand. But it would be a pretty elementary mistake to not include fixed effects
Benjamin Cole
Mar 10 2019 at 10:34pm
Jon-
Okay, I tried to read Appendix B of the Vigdor study, and I confess I found it confusing, But I see no reference at all to commercial or residential rents. It seems Vigdor is trying “seg out” the general economic climate. That is, if there is an economic boom, that might raise or lower the number of minimum wage jobs, so a simple headcount or ratio might be misleading.
When commercial rents are skyrocketing in Seattle, and residential flats rent for $2K a month—what would you think happens to minimum wage jobs? Demand might go up—more restaurants that can afford $15 an hour. More people who want janitors. Or maybe it would go down—those jobs have evaporated in such a high-cost environment.
So, I think I stand on firm ground when I say the Vigdor study is deficient, and the Berkeley study too. These are guys verifying their biases—and yours too, if you believe them.
Jon Murphy
Mar 10 2019 at 10:43pm
Appendix B goes into detail on the components of the model. Part of it is fixed effects, which takes into account rents and the like.
Benjamin Cole
Mar 11 2019 at 8:05pm
Please copy and paste segment from appendix B which accommodates rapid increases in commercial and residential rates and explains the effect of same on the number of minimum wage workers and the ratio of minimum-wage workers.
Jon Murphy
Mar 11 2019 at 8:42pm
The whole appendix? I mean, it’s explaining the synthetic control used. You can go into more detail here: https://en.wikipedia.org/wiki/Synthetic_control_method
Joe McDevitt
Mar 10 2019 at 2:30pm
Can anyone live on $ 15.00 per hr. x 40 hrs. = $ 31,200 Yr. Now take out taxes that could be total of 35% maybe there could be a base line on taxes lets say starting at $50,000 you would start paying taxes.
Phil
Mar 10 2019 at 7:33pm
The answer is yes. I worked several minimum wage jobs in my lifetime and survived. And am better for it.
More importantly, a minimum wage and a living wage are not synonymous, nor should they be.
Fred_in_PA
Mar 10 2019 at 9:43pm
Joe;
Roughly 30% of U.S. households do, so it must be possible.
Federal Guidelines set the poverty limit at $12,490 for a single individual. It’s $25, 750 for a family of four. (Although that family would likely have more than the one paycheck.) These numbers set a threshold for various income assistance programs. So usually, the family’s spendable income will be higher than their wages by the amount of such assistance.
And, generally speaking, a family at these income levels won’t be paying income taxes. Payroll and sales taxes are another matter. But my amateur’s instinct is that it’s still well below the 35% figure you cite — maybe half that?
MarkW
Mar 11 2019 at 3:46pm
Can anyone live on $ 15.00 per hr. x 40 hrs. = $ 31,200 Yr. Now take out taxes that could be total of 35%
A married couple of full-time $15/hr workers would have a household income of $62,400. That’s slight over the median household income in the U.S. There is a long list of (mostly rural) counties in the U.S. where the median household income is less than half of $62,400 (Google ‘U.S. counties with lowest median household income). Those places (many already struggling with unemployment) would be devastated by a $15/hr minimum wage.
Arthur
Apr 1 2019 at 7:05pm
I recall that roughly 85% of minimum wage jobs, nationwide, go to high school students for their first job. In other words, most people on minimum wage are existing on a minimum wage.
The minimum wage is a price point legally enforced at which a business owner will hire an inexperienced employee. There are places where the legal minimum has been too low (california )and businesses have been forced to bid up wages to entice even those unskilled workers. This is where the market clears on its own.
Where the unskilled employees are legally mandated to cost too much there is greater incentive to invest in alternatives. and the employment opportunities for unskilled labor go down. Of course this makes life even harder for those at the bottom of the economic scale who aren’t living at home with their parents. The government then forces up the minimum wage and those it is intended to help continue to get hurt.
So now we call for a guaranteed income because allegedly the minimum wage can never be high enough for those unskilled workers. This creates an incentive no to work at all.
The study suggests that as people get used to self serve, such as my local grocery store, it will roll out nationwide and no one will have full service available. This will continue to drive a higher schism between those at the higher end of the scale and those at the lower end.
In the end, we are solving a problem that does not need to be solved. The minimum wage, while unnecessary, enables a floor at which businesses are willing to invest in the training of unskilled workers. Since few are actually living at that wage we focus on this as an incentive for those few to improve their skills and increase their job opportunities.
No one said it is perfect but then incentives are intended to be unpleasant.
Thaomas
Mar 11 2019 at 7:11am
This is the kind of discussion we ought to have about minimum wages, based on estimates of elasticity of demand. The restaurant association was saying that demand was pretty elastic and that’s what this study showed. Hopefully it will persuade both supporters and opponents of minimum wages to shift their positions toward higher EITCs as a way of raising incomes of low skilled workers.
Thaomas
Mar 11 2019 at 7:15am
To add, an additional margin contributing to a higher elasticity in restaurant employment and one that specifically shows up in reduced hours rather than headcount is opening and closing times. I think I see this in changes in WDC restaurants which seem more likely to be closed for late lunches or early dinners than previously.
Michael Pettengill
Mar 11 2019 at 1:41pm
To pay for your higher EITC, high income workers should pay higher income tax rates instead of paying higher prices for food, and other things produced by low income workers?
Why should government ensure businesses can charge charge high prices to low income customers who work? Why should children and the disabled starve because you want only workers to get subsizied food, either high income workers buying food produced by poverty wage workers who get cashh from government to subsidize their buying of food pricced too low because of government low food worker wage policy?
Economies are zero sum.
If the IRS subsidizes the consumer spending of low income households, it needs to tax some people with money, ie, high income workers, that won’t harm businesses, ie, too much income to spend on cheap wage food.
EITC does not go to low wage workers, but to households, ie consumers. Your teen kid will not get EITC to incentivee his badgering you to drive him to his $6 net an hour job, nor will you get EITC tto cover the cost to you of driving your teen who will never afford the insurance that pays high income workers: commission sales, actuaries, lawyers, mechanics, doctors and nurses and other medical providers.
As a teen in the 60s, jobs paid to buy transportation plus other spending plus some savings. Today teen jobs do not pay enough to buy transportation. And I checked relative prices of transportation, and transportation isn’t much more costly: bicycles are much cheaper, small mopeds and scooters cheaper, small econoboxes about the same real price. The big change is you can’t rebuild a carb in your garage for $5 in gasket stuff, but must search salvage yards for the epoxy sealed ECU that still works for $200 instead of $800 from the OEM channel. (Epoxy sealed to keep out moisture that stops it working, not to prevent fixing it.) In the 60s, businesses and buses mostly used the same schedule, but today bus schedules are cut back, but business hours have expanded, especially for low wage jobs.
When the costs go up but price goes down, supply falls.
Worker costs, eg transportation, have gone up for low income workers while price, aka wages, have fallen in real terms for low income workers.
Michael Pettengill
Mar 11 2019 at 1:07pm
Who has done studies on the benefits to businesses of lower income customers?
Given cost cutting is the key to growth, shouldn’t businesses want their customer base to shift to lower income customers?
For example, Detroit businesses saw their customer incomes fall in the 60s and 70s as high cost whites left Detroit and low income non-white customers increased.
The lower wages on average should have been a boom for the existing businesses in Detroit. Right?
Mark Z
Mar 12 2019 at 4:24am
I’m confused by your argument. As wealthier people left Detroit, sure, the average wage declined because of the compositional change. Why would that lower costs for a business that only employed cheap, unskilled labor before they wealthier people left? Maybe because, as customers leave, there’s a decline in demand for whatever they produce, but no, a decline in demand for the good you produce is not good for your business; the fact that you can (have to) pay your workers less (if you stay in business at all) doesn’t make it good for your business.
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