Column: Fighting trickle-down economics in Seattle

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Labor activists listen during a Seattle City Council meeting in which the council voted on raising the minimum wage to $15 per hour in Seattle, Washington June 2, 2014. The Seattle city council voted unanimously on Monday to approve a sharp increase in the city's minimum wage to $15 an hour over the next seven years, marking the first time a major U.S. city has committed to such a high base level of pay. REUTERS/David Ryder (UNITED STATES - Tags: BUSINESS EMPLOYMENT) - RTR3RWZO

Trickle-down economics claims that if wages go up, jobs must come down. A controversial new study from the University of Washington has inadvertently fallen prey to that antiquated narrative, writes venture capitalist and minimum wage advocate Nick Hanauer. Photo by David Ryder/Reuters

Editor’s note: In June, a working paper by University of Washington economic researchers on the negative effects of Seattle’s minimum wage increase set off a flurry of dire headlines. “Seattle’s Minimum Wage Hike May Have Gone Too Far,” FiveThirtyEight’s headline read. “A ‘very credible’ new study on Seattle’s $15 minimum wage has bad news for liberals,” the Washington Post wrote. Conservatives pointed to the study as proof that raising the minimum wage hurts low-wage workers, while economic thinkers on the left rushed to discredit it.

Making Sen$e has long covered the minimum wage debate, from a 1996 interview with Princeton professor and Obama economic adviser Alan Krueger to the series from Seattle in 2013 when a minimum wage hike first appeared on the ballot there. Economists like Diana Furchtgott-Roth, who served as chief of staff of President George W. Bush’s Council of Economic Advisers, Veronique de Rugy of the conservative Mercatus Center and John Komlos, a liberal professor emeritus of economics at the University of Munich, have debated the pros and cons of raising the minimum wage on this page.

For this latest study, we asked venture capitalist, minimum wage advocate and Seattle native Nick Hanauer to weigh in. Hanauer has been one of Making Sen$e’s most popular columnists. His post, “This is why the middle class can’t get ahead,” drew 94,000 likes on Facebook. Hanauer has defended a minimum wage hike on this page before, with Mark Perry of the American Enterprise Institute arguing vigorously against him.

Below, Hanauer argues that the study by the University of Washington is a product of trickle-down economic theory and that workers in Seattle, contrary to the study’s findings, are doing just fine. You can read Texas A&M economist Jonathan Meer’s column on why we should take the University of Washington study seriously here.

— Kristen Doerer, Making Sen$e editor


Trickle-down economics is best known as the claim that when the rich get richer, that’s good for the economy. But the real perniciousness of the idea is its inverse: If the poor get richer, that’s bad for the economy. And the anchoring concept of that claim — that if wages go up, jobs must come down — is the narrative that has enabled the suppression of wages for poor and middle-class workers for a generation. A controversial new study from my alma mater, the University of Washington, has inadvertently fallen prey to that antiquated narrative.

As you may know, Seattle was the first major city in the nation to adopt a $15 minimum wage — an increase that began in 2015 and unfolds through 2021, depending on the size of the employer and benefits provided. (Full disclosure: I was on the 24-member committee that advised the mayor on this policy.) Pundits on the left and the right have looked to my city as the bellwether for wage increases nationwide, and every shred of data coming out of Seattle has been intensely scrutinized.

Over the last month, two university study teams have released two very different reports on Seattle’s minimum wage, and now everyone’s trying to discern the signal from a whole lot of noise. Let me help.

A report released by the University of California at Berkeley on June 20 was full of good news for Seattle’s workers. The Berkeley research team investigated seven years of food-service wages and found increased pay had no negative impact on employment. Or, in their own words: “Employment in food service … was not affected, even among the limited-service restaurants, many of them franchisees, for whom the policy was most binding.”

Low-wages are disappearing in Seattle, but jobs are not, exactly as we expected. What is happening is those low wages are being replaced with more livable wages for the same work — also exactly as we expected.

On June 26, a working paper from a study team at the University of Washington backed up those claims. A study from the same team last year found that workers’ wages increased, low-wage employment increased and the number of hours worked increased after Seattle raised the minimum wage. The latest study agreed with the Berkeley team’s paper that “analysis focusing on restaurant employment at all wage levels, analogous to many prior studies, yields minimum wage employment impact estimates near zero.”

Back in June of 2013, when I published an editorial in Bloomberg titled “The Capitalist’s Case for a $15 Minimum Wage,” I argued that raising the minimum wage would be good for everyone. In June of 2014, a Forbes blogger called my proposal “Near Insane.”

And now, three years after that, two independent study groups from two respected universities confirm that raising the minimum wage hasn’t negatively affected wages or hours worked in restaurants. This is great news that confirms our original thesis — the novel concept that when restaurant workers can afford to eat in restaurants, it works out better for everyone. Low-wages are disappearing in Seattle, but jobs are not, exactly as we expected. What is happening is those low wages are being replaced with more livable wages for the same work — also exactly as we expected.

But the University of Washington working paper abstract sounds a lot more damning. The study team claims that the latest round of wage increases — in which some large employers went all the way to $15 — saw a 9 percent decrease in hours worked. The paper also implies that the increase cut low-wage worker pay by $125 a month.

Before you go sharing some doom and gloom headline on Facebook, you should bear in mind that the University of Washington working paper arrives with at least three major caveats.

  1. The working paper defines low-wage as anyone who earns between the legal minimum wage all the way up to $19 per hour — a weird number which seems to redefine the idea of “low-wage labor.”
  2. Due to state labor data restrictions, the study excludes multilocation establishments. This is kind of a big deal, particularly since these locations employ nearly 40 percent of all workers in Seattle and since they raised the minimum wage higher and faster than single-location businesses. That means if you worked for a single-store establishment, but quit to go work across the street at a multistore establishment doing the same job for more money, the working paper counts that as a “lost job.”
  3. Much of the University of Washington working paper compares Seattle’s tremendous growth (more on this later) with that of “Synthetic Seattle,” a control group frankensteined out of Washington state ZIP codes in which the minimum wage didn’t increase. But given that Washington ZIP codes outside of Seattle tend to be nothing like Seattle, this is highly suspect.

READ MORE: Column: Why a $15 minimum wage should scare us

READ MORE: Column: Why a $15 minimum wage shouldn’t scare us

Synthetic Seattle, we’re told, created a few more jobs, and faster, with no minimum wage increase. Slightly fewer businesses supposedly closed and slightly more businesses supposedly opened. A few workers in Synthetic Seattle worked a few more hours than workers in real Seattle. But of course, you and I can’t work in Synthetic Seattle, because Synthetic Seattle doesn’t exist. It’s a model made up of parts of Washington state that didn’t see a minimum wage increase, but which did see similar rates of economic growth. I can’t tell you which parts of Washington state they are exactly — my office asked the University of Washington team to share their model and their data and, tellingly, they refused — but if you’ve spent any time in this state, you understand how truly bizarre this type of modeling is.

Most economists use synthetic models to measure effects of minimum wage increases. The Berkeley team used a Synthetic Seattle to reach their findings, and they calibrated their synthetic model so it tracks perfectly with real Seattle for six years before the wage increase. Importantly, they used ZIP codes from around the country that were from cities similar to Seattle in every way save the minimum wage increase.

Why do low-wage workers in the University of Washington working paper’s Synthetic Seattle outperform low-wage workers in real Seattle? It’s hard to say without access to the model, but because their Synthetic Seattle’s results match up with conventional wisdom — that fallacious claim made by generations of trickle-down proponents arguing that if you raise wages, you get fewer jobs — partisans on social media and credulous reporters in the conservative bubble are eager to repeat them. Confirmation bias is a hell of a drug.

Labor activists celebrate during a rally at Seattle City Hall after a Seattle City Council meeting in which the council voted on raising the minimum wage to $15.00 per hour in Seattle, Washington June 2, 2014. The Seattle city council voted unanimously on Monday to approve a sharp increase in the city's minimum wage to $15 an hour over the next seven years, marking the first time a major U.S. city has committed to such a high base level of pay. REUTERS/David Ryder (UNITED STATES - Tags: BUSINESS EMPLOYMENT) - RTR3RX17

Labor activists celebrate during a rally at Seattle City Hall after a Seattle City Council meeting in which the council voted on raising the minimum wage to $15 per hour in Seattle, Washington on June 2, 2014. Photo by David Ryder/Reuters

Once you set aside their synthetic models, the supposed “smoking gun” in the University of Washington working paper is a table that displays wage rates over the span of the increase to date. The total number of jobs beneath $13 per hour keeps declining. This is to be expected; it’s what happens when you raise the minimum wage to more than $13.

The table also shows a decline, to the tune of about 6,000 jobs, in the number of non-restaurant jobs paying between $13 and $19. (There’s virtually no decline at all on the restaurant side.) Are those jobs just disappearing into nothingness? The University of Washington working paper can’t say for sure, but the study’s team sure seems to think so.

During the same time period, however, workers in Seattle earning over $19 per hour increased by almost 44,000. If a worker left a janitorial position that paid $13 an hour and got hired by another firm for $21 per hour, so far as the University of Washington study team is concerned, she would transform from a low-wage, low-skill worker into a high-wage, high-skill worker, even if the new and old jobs both required the exact same skill set. Meanwhile, around the corner from my office, a Jimmy John’s sandwich shop posted a sign in their window offering employment at $20 per hour. Same job, higher pay — but for the University of Washington study team, once it went over $19, it counted as a low-wage job loss.

Jimmy John's

A Jimmy John’s sandwich shop in Seattle is offering employment at $20 per hour. Photo courtesy Nick Hanauer

Here’s what’s clear to me: Those disappearing jobs from the working paper haven’t gone anywhere; they just got better. We haven’t lost jobs. We just lost a poverty wage and replaced it with a living wage. (Hell, the fact that this paper has to define low wages as $19 per hour tells you how much the wage window has shifted in Seattle in just a few short years.) We have more jobs and more workers in Seattle; it’s just that fewer traditionally low-wage jobs still pay low wages. That’s terrific news  —  and it’s exactly why we implemented the $15 wage in the first place.

It’s quite possible that a highly competitive job market is driving Seattle’s wages even higher than the minimum. Right before the two papers were published, the Seattle Times published a story titled “Heated local economy has employers working hard to fill jobs,” which quoted a Washington state labor economist as saying that “Job seekers are finding it easier to secure employment, and employers are in a position of needing to compete with other employers for qualified candidates.”

The story even quoted one local restaurateur — someone, coincidentally, who agitated against the $15 minimum wage — making that same argument on Facebook in more colorful language: “I’d give my right pinkie up for an awesome dishwasher,” she wrote. “Where did they all go?”

So, uh, where did they all go?

When Seattle enacted the $15 minimum wage two years ago, unemployment sat at 4.5 percent. Over the last two years, our unemployment fell to 2.6 percent — the lowest ever recorded in our city and a number that comes alarmingly close to full employment. For two years running, Seattle has more construction cranes in its skyline than any other American city by far.

We have more hotels in Seattle than when we passed the $15 minimum wage. We added more restaurants — the most this city has ever seen. Businesses keep moving here. And it seems very unlikely that all those delivery driver and parking lot attendant and window washer positions are now being staffed by highly skilled middle managers.

King County, which surrounds Seattle, saw the largest year-over-year increase in employment in the country — in fact, it is the only large county in the entire United States to see an increase in average weekly wages. Employment is up in almost every low-wage industry. If there is a band of thousands of low-wage janitors and baristas roaming the streets in desperate search of employment, I have yet to encounter them.

Seattle metro hotel and restaurant job growth continues to outpace the nation.

Hotel and restaurant job growth in the Seattle metro area continues to outpace the nation, writes Nick Hanauer.

Here’s the thing: We didn’t just set out to raise a few paychecks when we raised the minimum wage in Seattle — though of course that was a goal too. What we wanted to do was inspire a civic conversation about the meaning and value of work, to redefine low wages and to examine the pivotal question of who gets what and why.

The dirty little secret behind the modern economy is that low wages are low not because some invisible hand dictated that they stay low. They’re low because rich people like me prefer not to pay more. The claims that employment will go down if wages go up is an intimidation tactic masquerading as economic theory. The truth is that people are not paid what they are worth — they are paid what they can negotiate.

There is a vast and growing body of evidence, which proves that minimum wage increases have little to no effect on employment. And while study teams on the right and the left continue to issue working papers arguing over whether Seattle is booming or doomed, I witness a city all around me every day that has enjoyed tremendous, almost unprecedented, growth.

Seattle is booming not in spite of the $15 minimum wage, but because of it.

Finally, let me share one last thing that I’ve noticed every working paper finds agreement on with regard to Seattle. It’s difficult to separate the effects of the increased minimum wage, every researcher cautions, from the city’s tremendous growth.

Amazon is expanding at enormous rates, they point out. Google and Facebook are investing in the city. High-wage, high-value employers are moving to town and setting up shop, and critics argue that these numbers are skewing the results of the minimum wage experiment.

I’d argue that these researchers have cause and effect exactly wrong. Seattle is booming not in spite of the $15 minimum wage, but because of it. Our growth comes because we have declared ourselves a high-wage, high-value city. Judged solely on the bottom line, it would make more sense for Amazon to set up shop in Topeka or Oklahoma City, but Amazon keeps investing in Seattle. Why?

Because we all do better when we all do better. Because when even dishwashers can afford to shop from Amazon and drink at bars alongside Amazon employees, that’s good for everyone, even the owners of the restaurants paying higher wages. That’s the choice we’re making every day in Seattle, and you can see the positive results everywhere you look.

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