New report on effect of minimum wage

The City Council will get a briefing Monday morning on a new study by researchers at U.C. Berkeley on the effects on the local food services industry of Seattle’s phasing-in of a $15 minimum wage.

Before we dive in to the details, there are some important caveats:

  • The minimum wage is still being phased in. On January 1st of this year, it ratcheted up to $15 for some large employers are $13 for some small employers, depending on whether they offer health insurance and/or let employees receive tips. The Berkeley study only looks at data through the first quarter of 2016, when the highest rate had just switched to $13. So it is an interesting and insightful study for what is happening on the way to $15/hour applied universally, but it is not the final word. Here is the time line for rolling out the minimum wage:




  • The question that these studies try to answer is a contrafactual: how does what is happening now compare with what would have happened if Seattle hadn’t instituted the phase-in to a $15 minimum wage? But since economies don’t stand still, you can’t gain much in the way of useful insights from comparing Seattle today with what it looked like in early 2015 before the minimum wage ramp-up began. So the study, like others before it, attempts to create a “synthetic Seattle” by looking at other cities and counties that have not raised their minimum wage – excluding places that are close enough to Seattle to possibly have seen “spillover” effects from Seattle (e.g. Bellevue and Tacoma). Here’s the list of counties they chose to compare wages, broken out by subsector of the food services industry:image

    The list is certainly eyebrow-raising, in that it doesn’t seem like any of these places would be good apples-to-apples comparisons to Seattle. Two points on that: first, individually, they don’t need to be; the test is whether collectively they are. Second, the researchers used wage and employment data from 2010 to 2014 to find the best “basket” of cities to match, and you can see that together they almost perfectly match Seattle over the four years leading up to when the minimum wage ordinance took effect:



    While past performance isn’t a perfect predictor of the future, this is a pretty good stab at creating a contrafactual scenario for the purposes of comparison.


So now that we have a point of comparison, we can ask the big questions:

Did wages go up? You can see from the above graphs that yes, they did go up, in some cases dramatically. For full-service restaurants, however, which are most likely to allow employees to receive tips, the increase wasn’t nearly as much.

Did the increase in wages depress employment in the sector? This is the case where the contrafactual is the most useful, since Seattle has continued to see explosive growth over the past two years. The contrafactual gives us a rough estimate as to how much employment growth we would have seen without the minimum wage in place. It looks like Seattle’s employment, while more volatile than “synthetic Seattle”,” gives about the same end result, perhaps suggesting that the steps up in the minimum wage might be causing small shocks to the system that settle out over time. But as of March 2016, there is no sign that the increases in minimum wage are depressing employment in the food services sector over the long term.

There are two more related caveats worth discussing: first, since the data only goes through the first quarter of 2016, three months after the step up to $13, we can’t draw conclusions about the long-term effects of a $13 minimum wage. Second, since at every step so far there have been multiple rates simultaneously for different businesses within each subsector, we can’t draw definitive conclusions about whether the highest rate in effect at any point along the ramp-up has a “threshold effect” at or above which things change. We can pretty definitely say $10/hour wasn’t a threshold because as of January 1, 2015 all food service businesses were paying at least that much and no effects were seen in the following 15 months. And we can probably say that $11/hour wasn’t a threshold either, since most businesses went to $11/hour at that time. And there simply isn’t data to support any conclusions above $11 at this point.

Many other questions need to be looked at as well. For example: did the number of new restaurant openings decline, or the number of closed restaurants increase? Did restaurants shift their policies on tips or offering healthcare as the minimum wage took effect?

As of a year ago, the sky wasn’t falling. We’ll learn more as economists continue to study the rollout of Seattle’s minimum wage. In the meantime, take comfort in the knowledge that the city will continue to keep economics researchers gainfully employed as this plays out over the next several years.