America’s grand wage experiment appears to be paying off.
On New Year’s Day, 19 states saw increases to their minimum wages, the majority of which were enacted through legislative efforts and ballot initiatives rather than the standard adjustments for inflation.
And while some economists have argued that artificial wage floors will shutter businesses and put low-wage works out on the street, that so far hasn’t been the case.
Take Seattle, where the city council passed an ordinance in 2014 raising the minimum wage to $15 by 2020. That decision was met with quite a bit of skepticism, with cynics saying that instituting a minimum wage floor would only end up forcing small businesses to lay off workers to make ends meet. But, according to a working paper released in October by researchers at the National Bureau of Economic Research, that hasn’t been the case: Their report, based on a ongoing University of Washington study of 14,000 low-wage workers, indicates that low-wage workers actually saw significant gains in their income while remaining in their jobs longer, with minimum wage increases from $9.47 hourly to $13 resulting in a bump of between $8 to $12 per week for wage workers.
The researchers suggest that minimum wage floors don’t necessarily end up costing wage employees money and jobs. “Evidence indicates that these workers experienced no significant decline in their likelihood of being employed and a modest reduction in their hours worked over the six quarters following the first and second wage increases,” they wrote. “Taken together, the minimum wage law increased these workers’ pretax earnings by average of around $10 per week.”
Those gains from a minimum wage hike were unevenly distributed, of course: According to the NBER research, employers have opted to retain the most experience or highly skilled wage workers. This makes sense, according to lead NBER researcher Jacob Vigor: “[B]usiness owners are willing to pay higher wages, but one of the things they’re looking for is workers who can be productive from their first day on the job.”
But in general, the NBER paper concluded that higher wages didn’t result in the sudden glut of layoffs among restaurants suddenly unable to afford newly pricey wage employees. And this is a surprising conclusion considering the source. The NBER working paper originated with a group of University of Washington researchers who, in an earlier examination of Seattle’s unusual minimum-wage increase, predicted it would result in shrinking paychecks and limited job opportunities, finding that, “because employers reduced hours in response to the city’s rising minimum wage in 2016, the researchers found, average pay fell by an eye-popping $125 a month, or about 6.6 percent,” the New York Times notes.
Every minimum wage experiment comes with its own particular methodological and political contours that make clear-cut predictions on how each policy plays out somewhat unpredictable. But the new research appears to not just align with a growing body of research on the effects of minimum wage increases. A 2014 analysis from the Center for Economic and Policy Research found that 12 of the 13 states that increased their minimum wage were, at the time the study was conducted, still experiencing employment growth six months later. Even those who rely on tips didn’t experience financial ruin (just as economists at the Cornell University Center for Hospitality Research had predicted).
So why, then, did two studies conducted by the same group of researchers and the same sample show such radically different results over time? The UW team attributed this to the “exceptional economic boom driven by rapid expansion of its high-skilled workforce” that arrived concurrently with the minimum wage increases; after all, Seattle was a wage oasis in a state where the minimum wage remained stuck at $9.47 during that time, even though the researchers observed “a relative and absolute reduction in the flow of new employees into the Seattle low-wage workforce” during that time.
But the answer is simpler: After initial shocks, Seattle-area small businesses were able to make rational planning decisions, especially since the wage increases were mapped out incrementally over time. While workers experienced “no significant decline in their likelihood of being employed,” the authors write, they did experience “a modest reduction in their hours worked over the six quarters following the first and second wage increases”—a trend that, in estimation, reflects managerial calendar shuffling designed to make up for wage increases elsewhere.
But time heals all wounds, and the fact that the Seattle minimum-wage increase has rolled out incrementally over five years makes the impact on local low-wage economies far more tenable for local businesses. Five years appears to be plenty of time for employers to build out “channels for adjustment“: reductions in labor turnover, improvements in organizational efficiency, reductions in wages of higher earners, and small price increases.
Seattle’s experience isn’t out of the ordinary—it just affirms the needs for gradual, municipality-specific wage increases rather than blanket shocks to a fragile economy. And it looks like they’re not the only ones: On January 1st, the rest of Washington state adopted a higher minimum wage as authorized through a ballot initiative. So far, America’s wage experiment appears to be a success—and it’s far from over yet.
