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More than a number: the impacts of a higher minimum wage

At the Laura and John Arnold Foundation (LJAF), we constantly think about how to improve people’s lives through better policy. How can we remedy the inefficiencies and injustice in our social, political, and economic systems? What will it take to create safer communities, better schools, and successful social programs? What policies truly foster an environment of economic opportunity?

We tackle each of these issues by first looking at the data and asking ourselves what we know about what does and doesn’t work. If, as is often the case, the body of evidence is either insufficient or inconclusive, we seek to fill gaps in the research. Our work is fiercely nonpartisan, and our end goal is to drive policymaking toward programs and policies that work, and away from programs and policies that do not—wherever they lie on the ideological or political spectrum.

The current debate over the minimum wage is an example of our approach in action. In recent years, we have seen various jurisdictions increase the minimum wage to as much as $15 per hour. The rationale behind this increase revolves around one key assumption—that a higher minimum wage will improve the lives of workers. This seems intuitive, and may in fact be correct. After all, higher wages translate into higher income levels for those who are working.

But we shouldn’t create policy from intuition alone. What does the research show on this question? The short answer is that the research is inconclusive. There have been numerous influential studies on the minimum wage, but these studies don’t tell us enough about how different wage levels affect workers, families, and communities. There are a number of shortcomings.

For one, previous studies have had difficulty answering critical questions—such as whether employers cut hours after a minimum wage increase went into effect, or whether an increase reduced workers’ eligibility for certain social services—because few data sources can provide the necessary information.

The existing research also has not established whether there is a tipping point—do workers benefit up to a certain wage and then experience negative consequences after that, such as reduced hours or loss of employment?

In addition, rather than studying how a minimum wage policy affects the entire low-wage labor market—or even a majority of it—scholars have devoted most of their attention to narrow segments of the market, such as teen workers or those in the restaurant industry.

Finally, studies have only analyzed small increases; they haven’t looked at more substantial raises like the $15 per hour minimum wage approved in several cities.

Given all of these limitations, it was clear to us that policymakers were enacting minimum wage policies based on inconclusive information. We believed that it was critical to fill these research gaps. In 2015 and again in 2016, we issued a request for proposals for research projects to study the effect of minimum wage policy changes on economic opportunity, mobility, and household wellbeing. We created a review panel of leading economic researchers to analyze each proposal and advise us on its merits, including its rigor and policy relevance. The panel included Hilary Hoynes and Emmanuel Saez from University of California, Berkeley; David Autor from MIT; and David Neumark from University of California, Irvine. With the panel’s help, we selected four research studies, each led by top economists in the field. These projects all use rich administrative data to study the effects of different policies in various cities and states. Each of the four studies looks at a broad range of outcomes, including earnings, job site transfers, and workforce reductions.

One of the selected studies, which received strong support from our review panel, looks at the effects of the recent minimum wage increase in Seattle. In 2014, the city passed an ordinance to increase the minimum wage from $9 to $15 per hour. Professor Jacob Vigdor and his colleagues at the University of Washington (UW) conducted an analysis of the 18-month period after the ordinance went into effect and recently released their findings, which included the following:

… (the) wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.

Prof. Vigdor’s study is more rigorous and comprehensive than any other completed to date, due in part to the fact that he and his team had unprecedented access to payroll records. The records covered a broad range of low-wage workers, not just teens and those who work in restaurants. With access to the payroll data, the researchers were able to see both employees’ earnings and the number of hours they worked. After studying that information, the UW team didn’t find any negative effects associated with an $11 per hour minimum wage. However, there was a tipping point. When the wage increased to $13, employers cut hours, meaning that even though workers were earning more per hour, they suffered a net loss. In addition, Prof. Vigdor’s study is one of the first to examine the effects of a substantial minimum wage increase. In fact, before this summer, no one had studied a wage over $12.

But although the UW study makes significant contributions to our understanding of the minimum wage, questions remain, and the study does have limitations. For one, it doesn’t involve multi-site employers, because UW researchers were not able to tell whether the workers for those companies were employed inside or outside the city limits. In addition, we can think of many reasons why the Seattle market today is idiosyncratic—high real estate costs, a relatively high prior minimum wage, and a robust economy.  These factors may very well preclude us from applying this work to other jurisdictions.

In short, as is true of many policies related to economic opportunity, the jury is still out on the minimum wage. But we are inching toward some answers. Prof. Vigdor’s study, along with many other high-quality research projects currently underway, will give us a better understanding of how wage policy affects workers and communities. We hope this work will further the spirited debate taking place across the country, and ultimately provide governments with reliable information that they can use when setting their minimum wage.

Josh McGee is a senior vice president at LJAF and head of LJAF’s results-driven government team. Michelle Welch is a research and policy manager on that team. 

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