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Seattle Minimum Wage Study Has Serious Flaws (washingtonpost.com)
"Remember the story from last week about how the new Seattle minimum wage law was hurting workers?" writes Slashdot reader PopeRatzo. "Well, it turns out that there are some problems with the study's methodology." The Washington Post reports:
First, their data exclude workers at businesses that have more than one location; in other words, while workers at a standalone mom-and-pop restaurant show up in their results, workers at Starbucks and McDonald's don't. Almost 40 percent of workers in Washington state work at multi-location businesses, and since Seattle's minimum wage increase has been larger at large businesses than at small ones -- right now, a worker at a company with more than 500 employees is guaranteed $13.50 an hour, while a worker at a company with fewer than 500 employees is guaranteed only $11 an hour -- these workers' exclusion from the study's results is an especially germane problem (note that low-wage workers in Seattle have had an incentive to switch from small firms to large firms since the minimum wage started rising).
In earlier work, in fact, the University of Washington team's results were different depending on whether these workers were included in their analysis; including them made the effects of the minimum wage look more positive. Second, the University of Washington team does not present enough data for us to assess the validity of its "synthetic control" in Washington -- that is, the set of areas to which they compare the results they observe in Seattle. The Seattle labor market is not necessarily comparable to other labor markets in the state, and given some of the researchers' implausible results, it's hard to believe the comparison group they chose is an appropriate one.
Suggesting Seattle's booming labor market may have skewed the study's results, two nonpartisan economists concluded it "suffers from a number of data and methodological problems that bias the study in the direction of finding job loss, even where there may have been no job loss at all." And the Washington Post also notes the researchers' findings are suspiciously "out of step with a large body of research," including another study from U.C. Berkeley researchers [PDF] which determined Seattle's wage increase "is having its intended effect."
In earlier work, in fact, the University of Washington team's results were different depending on whether these workers were included in their analysis; including them made the effects of the minimum wage look more positive. Second, the University of Washington team does not present enough data for us to assess the validity of its "synthetic control" in Washington -- that is, the set of areas to which they compare the results they observe in Seattle. The Seattle labor market is not necessarily comparable to other labor markets in the state, and given some of the researchers' implausible results, it's hard to believe the comparison group they chose is an appropriate one.
Suggesting Seattle's booming labor market may have skewed the study's results, two nonpartisan economists concluded it "suffers from a number of data and methodological problems that bias the study in the direction of finding job loss, even where there may have been no job loss at all." And the Washington Post also notes the researchers' findings are suspiciously "out of step with a large body of research," including another study from U.C. Berkeley researchers [PDF] which determined Seattle's wage increase "is having its intended effect."
You misunderstand what a free market is.
Free market means that governments or regulatory bodies cannot set the PRICE of goods and services. There's nothing wrong in setting minimum acceptable standards.
Ex: Sure.. mandate $150/Hr. then businesses can choose to either sell at existing price+$150, get rid or replace some employees and sell at same price.
Get it? the final PRICE is what's free to be decided by businesses.
Minimum wage and free markets can co-exist. Imagine if businesses said "Hurr-durr how dare government say I have to keep my premises clean huh? this is a free market dammit!"
Just because you can find an intuitive justification doesn't mean your intuition is correct either. And the fact that the study is flawed and the *other* studies on the same issue that don't have known major flaws point in the opposite direction are pretty good evidence. Time will tell, of course.
A more advanced economics course would explain that a distribution of wealth amongst the poorer increases monetary velocity (simply put: more people can afford to buy simple luxuries), which increases demand for products, which increases demand for employment, thus counterbalancing the depressing effect of higher wages in a virtuous cycle.
The above sometimes happens, empirically. But it doesn't always happen. Your introductory scenario also doesn't always happen. It turns out that economics is very complicated and you can't just top at what was taught in the first week of high school economics, you need to study the actual effects.
There are other factors. Industries sometimes choose low-wages and high turnover instead of higher wages and lower turnover, when the actual cost difference to the business is minimal. A higher minimum wage forces the business to choose something closer to the higher-wages lower-turnover end of the spectrum, to minimal effect on the business. It's also known that, to a point well in excess of any minimum wage anybody is considering, higher paid people tend to be more effective at their jobs -- it's not just that more effective people are more highly paid, it's actually a virtuous cycle. They've done studies where people test 13 points higher on IQ tests overnight when they go from having no money to having about a year's worth of money.
Obviously at the extreme of a $10k / minute minimum wage, nobody would hire anybody (unless hyperinflation happened), so there are limits. But if you're unconvinced of the possibility, I invite you to also consider something less politically fraught: https://en.wikipedia.org/wiki/.... Paradoxically, one can sometimes improve traffic by removing roads, and make traffic worse by adding roads. There are classes of problem for which the optimal form of the "Invisible Hand" gives suboptimal results. Optimizing the economy by optimizing each employment contract is a greedy algorithm, which is not always going to be globally optimal.
So reading between the lines, the study's results were largely correct when talking about small businesses, higher minimum wage hurts small business. But it doesn't matter, according to these idiots because McDonalds isn't affected by it as much as true small businesses. Since when are we vouching for McDonalds and Wal-Mart as good corporate citizens?
You can't lump in McD and Starbucks because even though they do employ minimum wage, they will employ minimum wage regardless of the cost. They are large enough enterprises with high enough profit margins to absorb these costs and in the process drive out any competition from small business, which is exactly what McD and Walmart do when they're coming to a new market anyway, they operate at a loss until all the competition has starved out.
I'm surprised actually that McD, Starbucks and Walmart don't actively drive minimum wages up just so they can completely drive out every other local business. If I were an 'evil CEO', I'd do that and then when I have 90% of a market, I'd lobby to get it reduced again or even just to get my company excluded.
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So, you are saying that people should be "free" to work for low wages where they can't afford food or shelter?
So, you are saying that people should be "free" to work for the highest wage they can obtain? Perhaps Seattle should introduce a maximum wage bill that caps wages at something reasonable, like $30/hour. I mean, if the government gets to decide what the minimum standard is for someone to live and how much they should be paid, then why not also define, set, and enforce a maximum standard as well?
This is actually a known and well understood problem in engineering disciplines. The optimum for an entire process is NOT the same as the optimum for each part of a process. Usually the two are not even related. That is why we have things like Whole Process Optimization. This was a basic part of my classes for chemical engineering and drilled home in quite a number of assignments and projects.
What I don't get is why is this a surprise to people in other fields or in economics. If you want a system to work efficiently you have to optimize for the entire system not just tiny parts of it. With society that is a very complex problem and requires a lot of analysis so you do have to simplify to some extent but the more variables you take into account and MEASURE the more likely the system is to work.
Right now I see companies doing what is best for them and then trying to justify that it means it is also best for the system. This is a losing proposition and without some kind of external correction the system will end up tearing itself apart.
Computer modeling for biotech drug manufacturing is HARD!
The discussion is about giving people enough money to afford food and shelter, not limiting their potential earnings. However, I could see that this suggestion might be good for corporate executives to limit their pay. Several countries/jurisdictions have actually implemented rules that limit executive pay to some multiple of the lowest wage their company pays. Usually it's a factor of less than 100.
You and others may claim that the discussion is about making sure people can afford to live. But more fundamentally, the discussion is about taking away choices from employees, employers, and even customers and other actors in the market. Ultimately, every government regulation is a removal of rights and choices. There are some instances where such removal of rights and choices is clearly in the best interests of one or more groups of market participants. Environmental regulations are a very good example, in particular because of the indirect nature of the associated costs and benefits. But an honest debate cannot be had when there is an unwillingness to have a balanced discussion that considers both sides of the issue.
Now, don't get me wrong, I am all for local and even state governments deciding on matters like this. I think Seattle's policy is wrong, but their duly elected representatives implemented it, so I am going to give them the benefit of the doubt and assume that they did it because that is what their constituents want.
The two problems that I have with the whole debate is: 1) proponents always frame it as a "we are here to help" sort of thing, while never willing to acknowledge that their "help" requires that everyone involved give up some of their rights (again, that is a matter for local jurisdictions to decide if that is an equitable exchange, the right of choice of employment for the guarantee of a better wage); and, 2) for some reason lots people seem to think that this is a matter for the federal government when it clearly is not.
So, to summarize, just be honest about what is actually being taken/given (this isn't a give only arrangement) and don't bring the federal government into it. Then, local governments are free to do as they feel is right in this matter and people who like can move there and work/start businesses and people who don't like it can go work/start businesses elsewhere.
Labor supply is anything but fixed. People take a gap year or go to law/grad school instead of getting a job, they retire early (possibly very early on disability), they work fewer shifts or less overtime or whatever, they work one job instead of two, they stretch their unemployment benefits out, they marry and raise kids at home rather than work. In the long run, they have more children or fewer.
One of the biggest changes in the workforce since 1970 or so is the increase in the number of women working full time, which happened almost entirely because they could specialize and improve their lives more by working outside the home than by working in the home.
How is the UW study to be considered flawed for excluding multi-site businesses while the UCB study ONLY looks at restaurants, where in many of which, minimum wage doesn't even apply?
The problem is that these are not "entry positions". They are the only jobs available for people trying to support a family. They don't pay enough for one person to live on and certainly not enough to support a family.
Funny... "simply look for the next job and find one that pays more"
Previous increases in minimum wage eliminated the truly entry level positions and the associated on the job training that would have allowed these people more freedom both to move up to higher paying jobs(possibly at a different company), or to start their own company(with it's own entry level positions).
It also means that the people trying to raise a family at the new minimum wage must compete with all of those who do not need to support a family and just want some extra cash such as students. Increased competition for a job means that the employer can provide fewer benefits and less tolerable working conditions until there are only just enough people desperate enough for the job to fill all of the available positions.
Then again the politicians bragging about raising the minimum wage do not care about unintended consequences, they just want their sound-bite and photo-op.
That doesn't work any more thanks to entitlements. The reality is that making twice of minimum wage isn't worth it. All it does is reduce your government assistance. Be it child care, rent reduction, food stamps, college assistance, etc. I'm not saying these things are bad, just that things aren't as simple as make a little more, lead a better life.
Hold up a minute. If the smaller business is allowed to employ people at a lower minimum wage than the larger business (and remembering here we're talking in both cases about a wage above the unregulated market wage for that job) then the smaller business has gained a competitive advantage relative to the larger business, compared with the prior situation.
So you'd expect the larger businesses to be contracting, and the smaller businesses to be expanding.
If the study shows that the smaller businesses are actually contracting, that means the damage in absolute terms to those businesses is greater than the benefit from being able to steal a march on their larger competitors. But that doesn't mean they aren't winning some trade away from the larger businesses, just that it's not enough to fully cancel out the damaging effect.
Not covering the larger businesses is a limitation of the study. But far from proving - or even suggesting - that they've expanded by an equal or greater degree to the contraction by SMEs, actually we can guess that the contraction there is EVEN WORSE. (Note here that we're talking about contraction in employment: it's possible the larger corps limited the damage to their profits by contracting employment even more sharply, e.g. the robo-servers we see taking orders in McDonalds).
Bottom-line: OK, that study had limitations. What study doesn't? But don't be too quick to say that implies the opposite of the study's conclusions: it might be even worse than you think.
But since nobody is actually proposing that- it's meaningless to study it.
What DOES make sense is to study what effects small and moderate minimum wage increases have on employment - since those are what actually happens.
Nobody would set such a high minimum wage because everybody knows it's insane and would have terrible effects. But it does not logically follow that a small increase would have the same bad effects.
Your bathtub is at 25C. Increasing the temperature of your bathwater by 100C would kill you, increasing it by 3C just makes for a nicer, more comfortable bath. Small interventions do not always have the same effects as a large version of the same would have.
The overwhelming evidence is that moderate minimum wage increases have little to no impact on overall employment rates. It makes sense too - what business would choose to LOSE money by firing people it needs and losing out on sales because it couldn't produce enough goods ?
A business would only start looking at layoffs if the increase is so big that they would lose MORE money paying those people than they will lose turning away customers (and that's BEFORE we even consider the possibility of having more customers when wages go up).
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