A few thoughts on Seattle

Seattle just voted in a new $15/hour minimum wage, although it doesn’t take full effect until 2021. So we’ll have to wait a bit to see the impact.  But what sort of impact are we looking for?

The usual debate pits liberals who see little or no job loss and very little extra unemployment, against conservatives who see lots of job loss and extra unemployment.  But there are other possibilities as well:

1.  Lots of job loss but not much unemployment.  Perhaps low wage firms move across the border to the suburbs.  Seattle itself has only 634,000 people in a metro area of 3.5 million.  Perhaps low wage workers move out with the jobs, as the city itself gentrifies.  For remaining low wage jobs in Seattle, unskilled Hispanic workers are replaced with college-educated millennials.  The Hispanics move elsewhere.

2.  Or maybe there is lots of unemployment but almost no job loss.  Suppose fast food companies view their existing facilities as a sunk cost, and swallow the wage increase.  Or suppose there is lots of monopsony power.  Then very little job loss.  But there might be lots of unemployment.  In development economics there are models where unskilled peasants move to the city and try to find the (scarce) well-paying jobs in the formal sector.  While they look for those good jobs they are unemployed, although that term might also involve some work in the informal sector.  Even the US has a big informal sector; I used to work in it when I was very young.

I’d like to argue that outcome #1 (low unemployment) has a conservative vibe, and outcome #2 (high unemployment) has a liberal vibe.  Outcome #1 assumes markets are very creative at getting around obstacles.  It doesn’t mean there aren’t any welfare costs from the policy, just that there won’t be much unemployment.

Outcome #2 is more interesting.  Liberals tend to argue that low wages are a huge problem for the poor.  Thus a $15 dollar wage would offer significant improvements in living standards (BTW, I agree with this, although I’d prefer the government paid the bill.)  Let’s say liberals are correct, and that the Seattle policy is a huge boon to the poor.  In that case low wage workers from other cities should flood into Seattle looking for one of those precious jobs.  Yes, the cost of living is high, but no higher than some other bigger affluent cities with minimum wage rates that are far lower.  The low-skilled workers will park themselves in the informal economy, or live off welfare, until they find one of those jobs.  Thus we have the odd situation where the law will be a boom to low wage workers if and only if it leads to a large rise in Seattle’s unemployment rate.

Of course this is just the tip of the iceberg.  Other possibilities are possible, such as reductions in non-wage benefits.  But with Obamacare coming on board I’m not sure how much firms will be able to cut costs in that area.  The underground (or informal) economy might also expand. Because the law doesn’t take full effect until 2021, the effects might be smaller than first advertised.  A wage of $15/hour in 2012 might be closer to $12 today.  Still high, but not absurdly high relative to the Seattle economy.  (This sort of law would probably have a bigger impact in the southern US, which is why many southern Congressmen oppose higher minimum wages, whereas former Massachusetts governor Romney is in favor.)

Now consider the impact of a wage-subsidy scheme, in a world with lots of migration and a fairly elastic supply of low-skilled labor at a wage rate of $7.25/hour.  The wage subsidy policy would mostly depress net wages to firms (more money for the 1%!), with only a small increase in gross wages to low-skilled workers. Migrants flood in. In contrast, a very high minimum wage and tight immigration enforcement would lead to much higher low skilled wages, and illegals from Mexico would return home as their jobs are taken over by better educated American born workers (back to the 50s–less for the 1%.)  The first policy mostly transfers money from American taxpayers to foreigners moving to the US.  The second policy produces an outcome that “looks” much better to most liberals.  But it’s the first policy that is actually superior from a liberal/egalitarian perspective.

In welfare economics, as in other areas of econ, nothing is as it seems.  It’s cognitive illusions all the way down.  Indeed I have doubts about whether money actually makes people happier (and no, those studies do not show causation.)


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38 Responses to “A few thoughts on Seattle”

  1. Gravatar of TallDave TallDave
    3. June 2014 at 09:25

    Don’t forget 3) a large increase in cash payments for labor

  2. Gravatar of Scott Freelander Scott Freelander
    3. June 2014 at 09:31

    Scott,

    Why not have open immigration, but disallow first generation immigrants to become citizens? Their kids would continue to be citizens upon birth here, and no one would face a danger of deportation. Then, apply the wage subsidy and certain other welfare benefits only to citizens, or offer non-citizens some lower level of benefits.

    This could help preserve some more jobs here for immigrants, save tax dollars, and would likely be a more popular policy than offering a wage subsidy to first generation immigrants.

  3. Gravatar of David R. Henderson David R. Henderson
    3. June 2014 at 09:32

    Scott,
    If the monopsony argument (which you have in #2) is correct, then there will not necessarily be “lots of unemployment.” A skillfully set minimum wage that is at or below the level where the supply curve meets the value of marginal product curve will not increase unemployment.
    Don’t get me wrong. I think your reasoning in point #2 is good reasoning, but only if you take out the monopsony part of it.

  4. Gravatar of Scott Freelander Scott Freelander
    3. June 2014 at 09:34

    Scott,

    And when it comes to money and happiness, my interpretation of the research is that money can provide significant happiness for those below a certain wealth/income(or consumption, as you like) threshold, for the poor, but after that threshold, the gains really start to diminish.

  5. Gravatar of Kevin Erdmann Kevin Erdmann
    3. June 2014 at 09:38

    Adjustments in non-cash wages might not simply adjust for the higher wage. I think, all else equal, the total value of employment for the worker, at the higher wage level, would be less than it was at the lower wage, because of diminishing marginal utility as adjustments are made between cash and non-cash compensation:

    http://idiosyncraticwhisk.blogspot.com/2014/04/minimum-wage-hikes-hurt-job-keepers.html

  6. Gravatar of Chun Chun
    3. June 2014 at 09:59

    Scott,

    If I remember correctly from international trade class I took a few years ago, your argument for wage subsidies sounds similar to production subsidies as the second best policy. Free trade is superior, but if government needs to give domestic businesses protection, production subsidies are better than tariff, quota or export subsidies because the efficiency loss due to productions subsidies is smaller.

  7. Gravatar of Elwailly Elwailly
    3. June 2014 at 10:00

    Many of the possible negative outcomes described are related to Nash equilibrium problems in game theory. Seattle suffers an economic loss relative to baseline because other places do not follow similar policies, whereas it is possible that if all follow the policy they all benefit relative to baseline. Is there a path to cooperative behavior in a world of multiple sovereigns? Is a Federal minimum wage justified in such situations? Is a global living wage mandate justified?

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. June 2014 at 10:15

    The monopsony argument is so ridiculous we should just drop it. Employers of low skilled workers are numerous. Janitorial firms, fast food restaurants, construction laborers, landscapers, retirement homes, all compete for the same workers.

    But the minimum wage is already having the predicted–it’s not the THEORY of Supply and Demand–dis-employment effect in Seattle. The newspapers here are filled with stories of small business people saying they’re putting on hold any plans to expand or create new businesses. Even the left-wing press has noticed.

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. June 2014 at 10:19

    I hope everyone enjoys a good laugh at Menzie Chen’s expense, as he introduces a guest blogger from Ukraine to Econbrowser;

    http://econbrowser.com/archives/2014/06/economic-prospects-of-ukraine

    Only to have him argue;

    ‘Ukraine has some of the lowest wage rates in Europe but at the same time the workforce is quite educated with the average years of schooling similar to those in Germany (see Table 1 below). Thus, labor in Ukraine is cheap but skilled.’

    A feature, not a bug!

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. June 2014 at 10:28

    Speaking of the ‘informal’ labor market, in Venezuela that’s now over 40% of the total. And growing; the INE estimates that 65% of new jobs are ‘informal’.

    And Kshama Sawant is already calling for further increases in Seattle’s ink-not-even-dry-yet minimum wage. She seems to be to the left of Maduro.

    http://timesofindia.indiatimes.com/world/us/Pune-born-socialist-Kshama-Sawant-scores-for-Seattle-Record-15-an-hour-minimum-wage-for-workers/articleshow/36011205.cms

  11. Gravatar of jb jb
    3. June 2014 at 10:31

    The companies can eliminate perks – anything and everything they offer for free or discount to their employees – *boom* – gone.

    They can cut back on hours, and try to hyper-tune the number of employees to the expected customer flow.

    They can start charging employees for parking, or key replacement, or create new fees for almost anything.

  12. Gravatar of Steven Kopits Steven Kopits
    3. June 2014 at 11:02

    SeaTac experience at $15. Bottom line: Economics works, more or less.

    http://seattletimes.com/html/localnews/2022905775_seatacprop1xml.html

  13. Gravatar of CMOT CMOT
    3. June 2014 at 11:03

    25 years ago Chicago Public School teachers were considered low-paid, and 70% were black and 20% were white. Now Chicago teachers are considered well paid, and whites make up 50% of the teachers, and blacks are at 23%.

    I’d bet no one in 1990 arguing for raising wages for Chicago teachers thought that white girls then living in the suburbs would be ones to get them.

    One of the reasons for the huge out-migration of middle class blacks from Chicago has been that as public employee wages have risen, more whites, hispanics, and other are taking middle-wage jobs once done by blacks.

  14. Gravatar of ssumner ssumner
    3. June 2014 at 13:06

    David, That’s correct in a closed economy model, but not an open economy model. A skillfully set minimum wage will not reduce employment, but it will increase unemployment.

    Scott, Actually the research does not clearly show that money can provide happiness. It suggests that money is correlated with happiness, at both low and high income levels. Correlation does not prove . . .

    Kevin, Yes, that’s possible. But I doubt it would be a complete offset, not at $15/hour.

    Chun, Good observation.

    Elwailly, Global minimum wages create other problems. Every policy has drawbacks, it’s a matter of finding the least bad one.

    Patrick, Liberals often lose sight of the fact that an informal job market is a side effect of some of their preferred policies.

    CMOT, Interesting.

  15. Gravatar of Kevin Erdmann Kevin Erdmann
    3. June 2014 at 13:45

    Scott, if at some wage level complete offset ceases to be possible, then employers would transition to workers who could offer more non-cash benefits to the employer – for instance, workers with more flexibility and lower benefit expenses.

    If an employer would choose a single mother or someone with medical issues who needs occasional time off for $8 over an independent, healthy 20 something at $10, then if the minimum is raised to $10, the employer would go with the independent worker.

    To the extent that the wage level can’t be offset, it would frequently work against the most vulnerable workers who require non-cash considerations, as it would remove their main potential advantage to the employer.

    To the extent that complete offset isn’t available, there will be some disemployment, since there are a wide variety of employers in different contexts and surely at the margin some will not be able to take the new costs.

  16. Gravatar of Major-Freedom Major-Freedom
    3. June 2014 at 13:50

    Sumner:

    “Scott, Actually the research does not clearly show that money can provide happiness. It suggests that money is correlated with happiness, at both low and high income levels. Correlation does not prove . . .”

    It is not money per se that is associated with happiness, it is what money can buy that is associated with happiness. A man with $1 billion dollars in cash, stranded on a deserted island with no hope of rescue, has less of an opportunity to increase his happiness with that money as compared to if he had “only” $1 million and was living in Greenwich, or a major metropolitan city, that is, a place with relatively more real wealth that money can buy.

  17. Gravatar of Brett Brett
    3. June 2014 at 13:52

    That’s a drawn-out implementation period. My guess is that the whole thing gets swamped by rising demand and wages with decreasing unemployment by then, so that instead of reductions in hours/jobs we just don’t get the creation of jobs that might have otherwise existed. The work will instead be done by existing (maybe slightly more) workers with higher skills in tandem with service sector automation, such as self-checkouts in fast food places.*

    * About time, too. I saw places in the Tokyo Metro Area that used machines to take payment and then gave you a ticket to give to the cook. It seems like a good policy, not only to save money but also to keep the cash out of the hands of the staff on site.

  18. Gravatar of Benny Lava Benny Lava
    3. June 2014 at 15:12

    Totally unrelated but I wondered what your take is on this Forbes article:

    http://www.forbes.com/sites/johntobey/2014/06/03/the-fed-is-about-to-spur-growth-by-raising-rates/

    Raising rates will spur growth?

  19. Gravatar of Jason Jason
    3. June 2014 at 18:26

    Scott,

    I try to illustrate the effective “model dependence” you are describing here (does a higher minimum wage should lead to more or less unemployment) — and take on the simplified “economics 101” view:

    http://informationtransfereconomics.blogspot.com/2014/06/seattles-new-minimum-wage-and.html

    I live in Seattle, so I guess I’ll get to see this experiment firsthand.

    One interesting thing is that WA minimum wage is higher than in ID, so out near Spokane what happens is many of the people in ID try to get jobs in WA (while living in ID). However, people in WA don’t go over the border to buy services generally.

  20. Gravatar of Benjamin Cole Benjamin Cole
    3. June 2014 at 23:02

    CMOT:

    I do not know the Chicago situation, but in Los Angeles the day may come, perhaps in 20 years, in which there will hardly be any blacks in the city proper.

    Hispanics and Asians have migrated into the city, and property values have soared. Lower-income people (unfortunately, this in general means blacks) are migrating inland.

    This boom in urban property values is not confined to L.A. It defines many major cities in the USA.

    In the USA, urban property values were the exception to global norms for a long time. In most of the world, the center of a city becomes the most valuable land. In the USA, postwar to, say, 1985, we went the other way and our cities died. But inevitable economic forces have reasserted themselves, and city living is making a huge comeback. Densities are rising.

    Like I say, I do not know Chicago, been there only once, but I really liked it. Great downtown, and I imagine that has only gotten better.

  21. Gravatar of dtoh dtoh
    4. June 2014 at 00:24

    Well, if I were running a restaurant in Seattle. I’d just put up a big sign that said, “In lieu of tipping we will be adding an 18% local government stupidity charge to your bill.”

    Not to mention of course all the other obvious consequences.

  22. Gravatar of Anand Anand
    4. June 2014 at 00:33

    Just on the point of informal economy in Venezuela. As far as I can see, that statement only reflects unexamined priors and does not look at the effect of Chavez/Maduro’s policies.

    http://www.elnorte.fi/archive/2010-5/2010_5_elnorte_ramoni.pdf

    The share of informal sector has been increasing since the early 90s. In fact the share of informal sector *fell* from 2002-2007. 2002 was when Chavez got control of the oil sector after the failed coup attempt.

    I do not know the trajectory post 2007.

    How does one disentangle the effects of the oil price boom and the “liberal” policies, since unemployment as a whole fell drastically post 2002?

  23. Gravatar of Anand Anand
    4. June 2014 at 00:40

    The reasons for the drop seem a bit more complicated than I indicated above. Some of the drop was due to reduction in active labor force, due to financial support discouraging job seeking.

  24. Gravatar of Morgan Warstler Morgan Warstler
    4. June 2014 at 04:52

    “Now consider the impact of a wage-subsidy scheme, in a world with lots of migration and a fairly elastic supply of low-skilled labor at a wage rate of $7.25/hour. The wage subsidy policy would mostly depress net wages to firms (more money for the 1%!), with only a small increase in gross wages to low-skilled workers. Migrants flood in.

    In contrast, a very high minimum wage and tight immigration enforcement would lead to much higher low skilled wages, and illegals from Mexico would return home as their jobs are taken over by better educated American born workers (back to the 50s-less for the 1%.) ”

    We can square the circle for liberals with GICYB:

    The lower you set the minimum offer $ per week, the more “fun” the jobs are for citizens. Which leaves the migrants to come in and do all the jobs no one wants to do.

  25. Gravatar of Roger Sparks Roger Sparks
    4. June 2014 at 05:02

    How will Seattle enforce the new minimum wage? I have yet to read an answer to that question.

    It seems to me that all employers will need to submit additional paperwork to Seattle and Seattle will need to add enforcers to the payroll. As a result, it seems to me that there will be added work for both employers and regulator.

  26. Gravatar of ssumner ssumner
    4. June 2014 at 05:42

    Kevin, Good point.

    Benny, You can probably guess my response.

    Jason, Thanks for the link.

  27. Gravatar of SG SG
    4. June 2014 at 06:01

    Scott,

    This is off-topic, but I’d be interested to get your take on Fed officials’ latest intimation that they’re eager to repeat the disastrous mistakes of 1929/2008:

    “Richard Fisher, president of the Federal Reserve Bank of Dallas, added to the chorus of concern over complacency in an interview Tuesday. “Low volatility I don’t think is healthy,” he said. “This indicates to me a little bit too much complacency that [interest] rates are going to stay at abnormally low levels forever.”
    http://online.wsj.com/articles/fed-officials-growing-wary-of-market-complacency-1401822324?mod=WSJ_hp_LEFTWhatsNewsCollection

    This is amazing. I learned in my undergraduate introduction to economics class that stability promotes welfare. But our monetary policymakers are worried that *too much* stability can be… destabilizing? What?

    And I love Fisher’s reference to those silly market participants expecting low interest rates, as if oblivious to the fact that the Fed has been promising such a policy for the last 6 years. It smacks of the same backwards thinking that afflicts policymakers and pundits in the EU. See this quote from a German journalist that Ashok Rao recently highlighted:

    “When told that persistently below-target inflation would harm the ECB’s credibility, Mark notes that many “experts’ expect inflation to soon again rise of its own accord. This statement is a great window into the minds of the European elite, motivating the idea that inflation is something that exists of its own accord, outside of monetary authority.”
    http://ashokarao.com/2014/06/03/the-europe-issue/

    The failure to correctly diagnose the nature and magnitude of our previous monetary policy errors puts us in an extremely precarious position going forward. Maybe volatility really is too low…

  28. Gravatar of Edward Edward
    4. June 2014 at 06:03

    Benny,
    That man is a lunatic

  29. Gravatar of Daniel Daniel
    4. June 2014 at 09:33

    I think it would be fair to say that Richard Fisher is a moron.

    The fact that such morons make their way intro the leadership of central banks is serious reason to reconsider their existence.

  30. Gravatar of Benny Lava Benny Lava
    4. June 2014 at 09:49

    Scott, I’m guessing you agree with Edward. So I guess you still have a lot of work to do.

  31. Gravatar of Mike Sproul Mike Sproul
    4. June 2014 at 11:56

    One neglected effect of a minimum wage is that it chases poor people out of town, along with all their unpleasant externalities. So my property values will rise, and I still get to claim that I did it to help the poor.

  32. Gravatar of ssumner ssumner
    4. June 2014 at 12:08

    SG, Sounds like Minsky. Stability promotes instability.

    Mike, Good point.

  33. Gravatar of Floccina Floccina
    5. June 2014 at 06:30

    In welfare economics, as in other areas of econ, nothing is as it seems. It’s cognitive illusions all the way down. Indeed I have doubts about whether money actually makes people happier (and no, those studies do not show causation.)

    This is only distantly related to the post but it seems to me that immigration has positive effects on the poor. Here is anecdote that illustrates why I believe that. I have a friend who lives on about the worst housing in Gainesville FL because his income is very low (I will not go into why). One of his neighbors stole his car they are mostly a mess but last weekend we where driving out of the areas and we saw some guys, he said that they were Mexicans immigrants and great guys. The poor immigrants are less likely to have the problems that are what keeps native Americans poor and so a diluting the troubled population and improving the neighborhood.

  34. Gravatar of ssumner ssumner
    5. June 2014 at 07:39

    Floccina, Interesting.

  35. Gravatar of Tom Brown Tom Brown
    5. June 2014 at 07:47

    Scott, it’s interesting to compare with Jason Smith’s view:

    http://informationtransfereconomics.blogspot.com/2014/06/seattles-new-minimum-wage-and.html

  36. Gravatar of Tom Brown Tom Brown
    5. June 2014 at 07:48

    Ignore the above… I see that Jason has already spoken for himself here!

  37. Gravatar of Floccina Floccina
    5. June 2014 at 07:48

    I forgot the tie in my post above.

    So immigration may lower low skilled worker’s wages but still increase their happiness. Many in the USA who are considered poor do not lack things but live in chaotic places with mostly bad neighbors. When I was in college, college dorms were great places to live despite being furnish with milk crates and the food being really bad (really, really incredibly bad). That was because of the good company. Immigrants often improve the company in he lowest cost parts of town.

  38. Gravatar of ssumner ssumner
    6. June 2014 at 05:33

    Floccina, Good point.

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