Everybody loves Seattle. It's among the nicest, most progressive places on the planet. Three years ago, Seattle announced a bold new plan to hike the minimum wage from $9.47 (U.S.) an hour all the way to $15. The move was widely applauded. Since then, the "Fight for $15" movement has caught on. Ontario, Alberta, California and New York State, among others, have all promised a $15 floor. Ontario's Liberals have made the $15 minimum wage a centrepiece of their election campaign. It's sure to be a vote-getter.
In principle, there's nothing wrong with this. You probably couldn't live on $9.47 an hour, and most other people can't either. The objection to raising the minimum wage is that it kills jobs. The debate over the "right" minimum has raged back and forth forever.
Now the latest results are in for Seattle, and they are devastating. A new study from the University of Washington found that raising the minimum wage from $11 to just $13 (the $15 rate doesn't kick in till later) had huge effects. Employment fell so much that the income paid to low-wage employees sank by roughly $120-million on a yearly basis. That worked out to a loss for each worker of $125 a month.
Read more: Cheers, criticism greet Ontario plan to raise minimum wage to $15
"The goal of this policy was to deliver higher incomes to people who were struggling to make ends meet in the city," Jacob Vigdor, one of the study's authors, told fivethirtyeight.com. "You've got to watch out because at some point you run the risk of harming the people you set out to help."
Critics have pounced on these findings with a vengeance. They're denouncing the study for flaws in methodology and much else. Seattle's mayor even commissioned a rival study that shows no effects on employment. But the University of Washington researchers had unusual access to detailed data on the hours and earnings of most employees in the state, which enriched their findings. The study has also earned praise from heavy hitters such as MIT's David Autor. "This is a 'canary in the coal mine' moment," he told fivethirtyeight. In The Washington Post, he said the study is "very credible" and "sufficiently compelling in its design and statistical power that it can change minds."
This is not what Ontario's Kathleen Wynne, or Alberta's Rachel Notley, or liberal policymakers, or liberal economists want to hear. For years, liberal economists have argued that the costs of raising the minimum wage are next to zero, and the benefits are large. "The economic arguments for higher minimum wages are both credible and compelling," a group of them wrote in The Globe and Mail last Friday.
The minimum-wage argument is one of the most politicized debates in all of economics. Many studies show that modest increases now and then don't really hurt. But there's a big difference between modest increases and the giant leaps urged by the Fight for $15 faction. As Bloomberg's Megan McArdle argues, most employers won't lay off workers just because they have to fork over an extra buck an hour. But forking over an extra 37 per cent (as in Seattle) is entirely another matter. The Washington study found that Seattle's first increase – from $9.47 to $11 – barely made a ripple. It was the second one, from $11 to $13, that hit hard. And they still have two bucks to go.
In Ontario, the push from $11.40 (Canadian) an hour to $15 is the biggest increase in provincial history. It amounts to a 31.6-per-cent raise in just 18 months. That extra cost can be a killer for small and mid-sized businesses that are already operating close to the line. Just ask Mark Josephs, the owner of a small Ontario business that makes freezies (an icy, sugary confection for kids). He told The Globe and Mail's Ian McGugan that the new minimum wage will add $600,000 to his costs. It doesn't stop there. Factory manager Jocelyn Bamford points out that people who already make $15 an hour are going to want raises of their own. The consequences will ripple up the pay scale.
Another obvious response to higher wages, of course, is automation. Let's hope you like interacting with a screen, because that's where the fast-food business is going. Supermarket checkouts will be next.
How to help low-income, low-skilled people at the bottom of the ladder is an important question. If jacking up the minimum wage by 30 per cent or 40 per cent did any good, then I'd be all for it. Sadly, Seattle's experiment shows there's no magic fairy dust after all. You only wind up hurting the people who are already the worst off. And that's probably a bad idea.