Recent increases in Seattle’s minimum wage have been closely watched across the world and the political spectrum. Indeed, wages for low-income workers are a hot topic both in the US and in the UK, with governments of all parties striving to create a ‘living wage’ in their respective societies.
There can be no doubt that raising the minimum wage is well intentioned, but does it work? As Milton Freidman observed, ‘the great error in evaluating policies is to judge them by their intentions and not by their effects’. This article from Bloomberg provides a well-balanced overview of a history of the minimum wage, and the consequences of raising it in different markets. Academic study would suggest that employment markets are able to withstand certain raises in the minimum wage without negative consequence, but that the point at which the negatives outweigh the positives is way below any arbitrary figure large enough to be useful in political rhetoric.
In Seattle’s case, Progressive political groups celebrated the city’s decision to raise the minimum wage significantly in a series of stages, although a recent study has shown the very people who should have benefited from this (minimum wage workers) have ended up $125 per month worse off as their hours have been cut. Predictions from free-marketeers that this would hasten automation are yet to be proven or disproven, but there can be no doubt that the point at which investing in automation to replace minimum wage roles is now closer than it was when the minimum wage was lower, since companies now stand to save more by laying off workers.
It begs the question – if raising the minimum wage makes the poorest in society worse off, why is it so popular? Alas, we live in an age where slogans are valued over substance and policies and proposals are evaluated from an ideological standpoint, not from a critique of what their effect may be. I’ve noticed in Britain following the smoking ban and an increase in the tax on alcohol we all seem to be scratching our heads as to why all the pubs are closing.
Indeed, for all the talk of ‘Austerity Politics’ a recent study showed over 50% of UK households receive more from the State than they pay in, and the proportion of total GDP accounted for by state spending is still well above 40% even after well-documented cuts. If I may coin a phrase: ‘Crisis of Capitalism? What Capitalism?’
Most importantly, Seattle has shown the vital importance of employment law, and that’s before factoring in the ‘J – Curve theory’, the idea that every economic policy will not show it’s true effects until 18 months after it is implemented and that even if the policy is beneficial in the long-run things will likely get worse before they get better. Although, given the long-term study cited by the article, is it already too late to repair the damage done in Seattle?
No, it isn’t – but only if the future holds evidence-based policy making, and I would welcome comments from my network on the lessons they’ve learned in their careers which could be used to improve employment law around the world.
The University of Washington released its second study, this one covering the increase from $11 an hour to $13. And this study found huge effects: For every 1 percent increase in their hourly wage, low-wage workers saw a 3 percent reduction in the number of hours worked. As a result, they lost about $125 in earnings a month, clawing back the entire gain from the earlier hike and more.