Minimum wage—good intentions not good enough

Proponents of raising the minimum wage in Canada should take note of a new study on the economic effects of minimum wage hikes in Seattle.

In a nutshell, the study by University of Washington researchers found that Seattle’s minimum wage hikes have hurt the city’s most vulnerable workers. Despite good intentions, the people the policy was supposed to help have suffered from fewer employment opportunities, reduced work hours and lower overall earnings.

One can only hope that political leaders and labour activists in Canada will heed this new evidence—along with the mountain of evidence that already exists—and accept that a dramatically higher minimum wage is the wrong policy to help lesser skilled, low-wage workers.

Seattle’s experiment is telling for a couple reasons. It was one of the first jurisdictions in North America to commit to the arbitrary target of a $15 minimum wage, so its experience should, in theory, help assess the likely outcomes of a $15 policy elsewhere.

In addition, Seattle’s economy was growing strongly when the minimum wage was increased (due partly to a construction and tech boom), meaning the city’s strong economy likely muted some the negative consequences. In a weaker economy, the consequences could be worse.

The Seattle study analysed the effects on low-wage workers (those earning under $19 per hour) of the first two phases of Seattle’s minimum wage increase. The first phase increased the minimum wage from $9.47 to $11 per hour in 2015. Then the rate was increased again to $13 per hour in 2016. Critically, the study doesn’t measure the complete economic effects of Seattle’s $15 minimum wage, which came into effect January 2017 (for large employers that do not provide medical benefits), since the data only covers increases up to $13 per hour.

Here’s what the study found. After the minimum wage increased to $13 per hour, the total number of low-wage jobs declined by 6.8 per cent—a drop of more than 5,000 jobs.  And the number of hours worked by low-wage workers that retained their job fell by a total of 9.4 per cent.

Put differently, low-wage workers were hurt on two fronts—some lost their jobs while those who retained their position had fewer available hours of work. In Seattle’s case, the reduced hours meant that low-wage workers on average had lower earnings.

While the minimum wage increase from $11 to $13 directly raised average earnings for low-wage workers by $54 per month, reduced hours cost low-wage workers an average of $179 per month—with a net reduction in earnings of $125 per month for low-wage workers. That represents a 6.6 per cent average decline in earnings for low-wage workers.

What’s particularly concerning is the reduction in earnings was more severe from $11 to $13 per hour (in 2016) than the initial increase from $9.47 to $11 per hour (in 2015). That suggests Seattle’s increase to $15 per hour will have an increasingly negative impact on low-wage workers, as the rise in the minimum wage per hour is offset by a greater rate in decreased hours worked—thus potentially leading to further lost earnings.

The findings from Seattle clearly do not bode well for other jurisdictions planning a $15 minimum wage.

Alberta has already committed to a $15 minimum by October 2018. In Ontario, the Wynne government recently announced a plan to hike the provincial minimum wage to $15 per hour by January 2019—a marked 32 per cent increase from the current rate within 1.5 years. And British Columbia is also debating a $15 minimum wage, as are other jurisdictions in Canada and the United States.

Seattle’s experience should be a harsh reality check—significant minimum wage hikes harm low-wage workers. Sound public policy must be evidence-based. Good intentions simply aren’t good enough.