The Problems With Seattle’s Minimum Wage Debate

Recently, a University of Washington study released on the impact of raising Seattle’s minimum wage from $11 to $13 in 2016 showed some disturbing effects. It revealed that the number of minimum wage jobs declined and while lower-income workers were making higher wages they were employed fewer hours, resulting in a net loss in wages.

The study, commissioned by the city, was so disheartening that the mayor of Seattle decided to get another study done that would show better results. But trying to come up with another study that proves an argument because the implications of the first are not what were expected won’t help the people impacted by the policy. It will keep the minimum wage debate alive, though.

That said, some limitations to the University of Washington study, as pointed out by economist Michael Strain, show that Seattle’s experiment won’t end any time soon.

The data it used make it difficult in some instances to determine whether a particular job is in the city of Seattle or elsewhere in Washington state, and the study attempts to deal with this challenge by limiting its scope to workers at single-location firms. The data also don’t include contractors.

To determine the effects of Seattle’s minimum wage increase, the study compares hours and wages in Seattle to those in neighboring counties, before and after the Seattle increase. This is reasonable, but one could also reasonably be concerned that those neighboring counties are not the best comparison group. To address this possibility, the study uses more complex statistical methods. There again, it’s reasonable to question those methods — but not the conclusion that the Vigdor study materially advances our understanding of the effects of the minimum wage. It’s hard for me to understand how any economist could conclude otherwise (emphasis added).

At the same time, the Vigdor study is just one study. Should it increase our confidence that minimum wage increases can hurt low-wage workers? Of course. Does it prove that point for all time in all places? Of course not. The Vigdor study covers only one city. The economics of city-specific minimum wage increases are probably somewhat different from that of state or federal increases. It’s also hard to be sure that what happened when Seattle increased its wage to $13 per hour in the context of getting to $15 per hour can be generalized to what might happen if, say, Kansas City increased its minimum wage to a different amount in a different context over different years.

So where does this leave the debate over minimum wages? Right where it was before: confused.

In other words, the University of Washington study was conducted as professionally and with the best methodologies available to economists to sort through the information. But circumstances are not static, and trying to prove an overall argument of the minimum wage debate based on one city’s experience is an instance where politics gets in the way of policy.

The rise in the wage was part of a three-year plan to get Seattle’s minimum wage to $15 per hour. The last bump took effect at the beginning of this year. Concerns that the impact of such a sharp minimum wage increase hurts lower income workers are legitimate even as the impact of the final increase have yet to be determined.

The Vigdor study does not subscribe to a social policy. It merely points out the effect of the social policy chosen in Seattle for Seattle are not what the engineers had hoped. As Strain points out, popular solutions are not necessarily the best solutions for the people the solutions are targeted to help.

When thinking about whether minimum wage increases are good or bad, you have to think clearly about the social goal you are trying to achieve. If your goal is to help reduce income inequality and to increase the earnings of some middle-class households, then the minimum wage is not a crazy policy.

But if your goal is to help the least skilled, least experienced, most vulnerable members of society to get their feet on the first rung of the employment ladder and to start climbing, then the minimum wage is counterproductive. Its costs are concentrated among those vulnerable workers. It is an obstacle in their paths. It is bad policy.

Read the complete Strain article at Bloomberg

A Tax Fix That Helps Single Adults More Than Raising the Minimum Wage

Last week, a study released by the University of Washington on the impact of Seattle’s decision to raise the minimum wage to $13 caused quite a stir. The study showed that the sudden increase in the minimum wage – from $11 to $13 – led to low-wage workers facing reduced hours, fewer jobs, and lower earnings. These effects were not seen after the first increase from $9.47 to $11 in 2015, but they did appear with the minimum wage increase in 2016.

When the city first decided to implement a $15 per hour minimum wage (the $15 hourly wage took effect Jan. 1 of this year), supporters of raising the minimum wage argued that it would allow lower-income employees to earn more money. Opponents warned that it would cause people to lose their jobs.

Some opponents of raising the minimum wage say other methods for helping low-income workers would be more effective while not harming employment rates. One such idea is a tax credit that would be given to low-income workers in direct proportion to how much they earn on their own.

The idea is that if you work, you can benefit up to a certain salary by getting supplemental income. The program is called the Earned Income Tax Credit (EITC).

How useful is the EITC? According to MDRC, a research group that studies the impact of social policy, the EITC has three major advantages:

The EITC encourages and rewards work. The EITC supplements each dollar that a low-wage worker earns up to a certain limit, providing incentives for the unemployed and welfare recipients to work and for low-wage workers to work more hours. A strong body of evidence demonstrates that work-based earnings supplements such as the EITC boost employment and earnings while increasing work effort.

The EITC reduces poverty. In 2015, the EITC lifted about 6.5 million people out of poverty, including about 3.3 million children. The number of poor children would have been more than one-quarter higher without the EITC. The credit reduced the severity of poverty for another 21.2 million people, including 7.7 million children. Workers in cities, small towns, and rural areas all benefit from the EITC.

EITC payments support important investments by families. Research indicates that families use the EITC to pay for necessities, repair homes, maintain vehicles that are needed to commute to work, and in some cases, obtain additional education or training to boost their employment prospects and earning power.

What the EITC doesn’t do is help people who don’t have kids or who have kids but don’t have custody of them. That’s why MDRC conducted a study in New York City and Atlanta to see the impact of extending the EITC to single adults.

Why is it important to help single or childless workers? Well, because when wages and employment rates fall, low-skilled, low-income workers get hurt the most, and that particular segment of the workforce includes a lot of single people! And there’s another tidbit to consider: Many of these adults in fact do have children but are not the custodial parent. So even when they don’t have kids in their households, they are responsible for children.

The three-year MDRC study in New York concluded that when people received the extra boost to their income (which maxed out at $2,000 per year for three years), they not only increased their pay, but the number of people employed also increased.

An added bonus to the uptick in incomes is that a significant segment of people in the pilot program ended up paying more of their court-ordered child support payments!

Paycheck Plus recipients paid an average of $54 per month more in child support than individuals in the control group — a 39 percent increase.

An additional benefit found in the study is that when people used the EITC, they actually filed their taxes. Now, that may seem like a negative to some — paying taxes isn’t exactly high on the list of stuff to be happy about — but paying taxes is a civic responsibility, even a legal requirement. And saying that you pay taxes is actually a common way of arguing that you have a say in how this country is run. So, hurray for the humblebrag. Now stand up and be counted.

EITC isn’t the be-all answer to ending poverty, and the tax credit does suffer from high error rates, but as a means of pulling people off the couch, it is a good way to encourage and reward work, and work is a formidable tool for helping people get more than just money. It is a means for providing dignity and learning skills that enable workers to aim higher for themselves. That path starts with the first dollar earned.

Shock Story: Exploiting the Homeless Addicted for Profit

The Washington City Paper is reporting a completely distressing story entitled “Eviction Companies Pay  the Homeless Illegally Low Wages to Put People on the Street.”

The headline pretty much says it all, but some of the details are worth noting. First, the homeless are coming to a local shelter in D.C. each day hoping to be picked up as day laborers. Second, the men (and occasional) women homeless people are generally dealing with addiction of some kind. Third, the eviction companies have already been sued about paying below minimum wage to these day workers. Fourth, while the payments are extremely low, the companies pick homeless addicts and occasionally supplement the wages with alcohol. This effectively drives the homeless addicts to get another fix, which then leads them back to the miserable work arrangement so they can get just enough money to get another boost.

Here’s part of the report:

A man who works for both Street Sense and on the trucks, who is homeless and did not want to be named for fear of retribution from the eviction companies, says he first got work on an East Coast Express Eviction truck right after he moved to D.C. several years ago. He had heard through the grapevine that employment was available outside S.O.M.E. and was surprised to find that he did not need to fill out paperwork. When he first got on the truck, he says he saw a cooler of beer, and thought, “I’m in the right place.” It seemed like a party—and it was—drinking in a van with other guys before work. But he soon learned that whatever he drank would be deducted from his pay at the end of the day. 

And he realized why the men were getting beers. “We have seen babies crying, grandmas. … You get a beer, so you don’t have any emotion,” he says in an interview at the Street Sense offices. “You do some kind of drugs, so then you don’t care, so you leave them on the curb over there crying, and go on to next one.” He says the evictees don’t get any information either—no shelter listing or hotline number.

The man, who struggles with a drinking problem, also says it was no mystery to him why eviction companies continued to show up outside S.O.M.E. even after the lawsuit. “Instead of choosing someone professional who says, ‘I can’t do it,’ they choose people who don’t have any feelings anymore, and have given up on life,” he says. “Because they will get on this truck for $7.”

As poverty and homelessness research Kevin Corinth states, this is NOT OKAY. But Corinth’s reasons aren’t exactly what you may expect. For one, he’s not arguing about whether the minimum wage is “fair.” Nor does Corinth have a problem with eviction in principle. Even as a researcher on homelessness, he acknowledges that landlords have a legal and moral right to be paid rent for providing living accommodations. As he points out, “Stopping all evictions would mean that landlords would no longer be willing to accept the tenants who are at greater risk of defaulting on their rental obligations in the first place.”

Corinth also doesn’t have an issue with the person who would take the job of evicting a family because while difficult to do, a professional and empathetic worker can “help preserve a sense of humanity in the face of horrible circumstances.”

For Corinth, his issue is with eviction companies that would exploit homeless people with addiction to keep them coming back to the illegally low-wage job.

Rather than being encouraged to serve with professionalism and empathy, they are encouraged to numb their humanity with alcohol.

And that means that families at their lowest point are dehumanized as well. Their personal belongings are handled by crews of men who have shut down. Meanwhile, some workers reportedly engage in theft to supplement their wages. As ACLU attorney Scott Michelman puts it, “[l]osing your home shouldn’t mean losing your dignity.”

Corinth says there are solutions to the mistreatment of homeless addicted aside from taking these companies to court. They include relaxing regulations on how many workers must be used to clear out a house, which leads eviction companies to look for cheap, unqualified work crews.

Another solution could be to prevent evictions from happening in the first place. Recent research has shown that offering families who are at risk of homelessness modest one-time payment leads to sharp reductions in entries into homeless shelters (and presumably reduces evictions as well).

The research Corinth references is here. It notes that one funding experiment found that giving someone who is about to become homeless a single cash infusion, averaging about $1000, could delay homelessness for two years. The research was done by offering one-time cash payments “to people on the brink of homelessness who can demonstrate that they will be able to pay rent by themselves in the future, but who have been afflicted by some nonrecurring crisis, such as a medical bill.” The team found those who received the cash infusion were 88 percent less likely to become homeless after three months and 76 percent less likely after six months. That’s a worthwhile investment when the overall cost of homelessness to society is much more expensive.

Read Corinth’s commentary here.

How the ‘Fight for $15’ Movement Can Undermine Those It Aims to Help

What’s a better solution — higher wages at the cost of jobs, or more jobs with lower wages? If you’re interested in seeing more people working, the latter is the better option. But it’s not just about the number of jobs. That’s why several economists question the logic of the “Fight for $15” movement or other minimum wage arguments.

“While boosting wages for workers is critical, helping workers retain their jobs and stay on the income ladder makes more sense for the economy.”

That’s what economist Aparna Mathur says in a recent article on wage hikes. Even the nonpartisan Congressional Budget Office found that raising the federal minimum wage to $10.10 per hour could result in the loss of 500,000 jobs.

Mathur notes that several localities aim to increase the minimum wage in the next few years, and warns that the people who are going to feel the impact are the very workers who would benefit from not being paid a mandated minimum wage.

Most policies of any kind involve trade-offs, and minimum wage hikes are no exception. When the government mandates that employers must pay minimum wage workers more — i.e., the hike is not because of any increases in productivity or skills — employers will strategize about how to recover the added costs. Can they pass them on to their customers? Should they invest more in automation? And of course: Should they decrease the size of the work force?

Mathur acknowledges disagreement in the economic models on the impact of minimum wages. It’s more than just the number of jobs available, the minimum wage is a variable with major reverberations to the overall economy and how work is conducted.

She points to the results of a major recent study by New York University. The study found that raising the minimum wage had a small impact on the overall drop in hiring, but a much greater impact on the amount of work each worker is doing.

Hours worked fell sharply, with reductions as large as 3% across all workers and 25% for the lowest-wage jobs. Presumably, the study’s authors wrote, some of the reduction was caused by employers economizing on labor. However, they also wrote, hours worked also likely fell because employers hired more productive workers.

And what’s the outcome for managing less productive employees? Automation, of course. The dreaded “robots.”

Many stores and fast-food restaurants are already planning this transformation. For example, McDonald’s plans to move away from cashiers to touch-screen kiosks nationwide and to allow mobile ordering rather than pay an employee $15 an hour to bag French fries. Wendy’s is considering a similar move. Walmart already is automating many positions that employ hourly workers.

Mathur says if government policy really wants to help low-wage workers, it could try more creative approaches, like the Earned Income Tax Credit program.

A targeted program with no risk of job loss, the EITC has been proven to lift people out of poverty, and it is the best way to boost incomes for poor households.”

At the same time, encouraging upgraded skills for workers through greater investments in on-the-job training and paid apprenticeship programs for younger workers would allow for greater upward mobility even for workers starting off in minimum wage jobs.

While boosting wages for workers is critical, helping workers retain their jobs and enabling them to move up the income ladder is even better. The risk of job loss that comes with a minimum wage hike threatens the ability of these workers to get on that ladder. States that are on track to approve such an increase should proceed with tremendous caution.

Wage Hikes: Proceed with Caution

Edmund Burke: The Link Between Economic Liberty and Human Flourishing

Edmund Burke is one of the most famous philosophers in the Western world. A member of the British Parliament from Ireland in the 18th century, Burke, a gifted orator and author, was not an economist, but had a major impact on the field of “political economy.”

Author Yuval Levin, in one of a new volume of essays on the great philosophers and their impact on economic liberty and human flourishing, notes that Burke’s thinking centered on the complexity of society, and with it, the inherent inability to regulate all manner of it without a moral consensus.

For him, economic life was best understood from the bottom up. He suggested that the power of markets, in our modern parlance, was that they enabled decisions to be made close to the ground and so aggregated society’s knowledge in much the same way that our other core social institutions do.

Note the emphasis on “social” institutions. Burke was fully aware that many people were not exposed to opportunity to improve their lives, and he wasn’t a huge believer that a high tide would lift all boats. But he was hugely skeptical of the ability of some so-called equalizing central force to intervene and correct course. In other words, he opposed government intervention in economic exchange.

At the same time, Burke did not believe in the principle of “rugged individualism” as a means by which society should manage itself because people whose limits come only from self-imposed guidelines are subject to injury from their own whims and foolish ways. In short, he questioned whether liberty could survive if each person is going to be left to his own devices.

Levin quotes Burke directly to elucidate the point.

Men are qualified for civil liberty in exact proportion to their disposition to put moral chains upon their own appetites. In proportion as their love to justice is above their rapacity, in proportion as their soundness and sobriety of understanding is above their vanity and presumption, in proportion as they are more disposed to listen to the counsels of the wise and good, in preference to the flattery of knaves. Society cannot exist, unless a controlling power upon will and appetite be placed somewhere; and the less of it there is within, the more there must be without. It is ordained in the eternal constitution of things, that men of intemperate minds cannot be free. Their passions forge their fetters.

Levin then uses a principle of physics to sum up Burke’s position on why society is the force by which to constrain man: something can’t come from nothing.

Each human being arrives in the world as a new member of an old order, and far from a constraint upon our freedom that must be overcome, this fact is what makes our freedom possible. The primary reason for that, Burke argues, is that human beings have to be formed for freedom and are not born with that form. It is a social achievement. Social theories that begin with the free and rational individual alone seemed to him to beg a question they can never answer: where does this free person come from? Every person, after all, comes from a family—which is not a liberal institution—and enters the world both unable to exercise freedom and encumbered by all kinds of social relations that operate as restraints. To get from that beginning to the exercise of liberty, let alone to a society of free people exercising their liberty, requires much more than the absence of restraint.

Nonetheless, Burke believed that society would reach agreement and cooperation through a gradual evolution of its own morés, not the controlling external power of a technocratic central authority.

Through continuous, incremental change at the margins rather than sharp breaks and jostles, societies come to express in their institutions, charters, traditions, and habits a kind of simulacrum of the standard of justice. Society as it exists after such long experience comes to offer an approximation of society as it should exist.

In practical terms, Burke opposed what is now well-known as minimum wage, and he argued that employer and employee would be able to negotiate terms favorable to their own self-interests. He rejected what would come to be known as a central principle of Marxism, the effort to create “compulsory equalizations.” He said it would pull down the top toward the bottom rather than raise the bottom to what the top could achieve. Burke himself warns what comes from that effort to make all things equal:

A perfect equality will indeed be produced; that is to say, equal want, equal wretchedness, equal beggary, and on the part of the partitioners, a woeful, helpless, and desperate disappointment.

While Burke is quoted at length by Levin to describe the debate of farmer or laborer and employer over wages, Levin points out that Burke lived in a pre-industrial era, and that the market economy would end up disrupting pretty much every social arrangement — whether it be family, housing, congregation, or small business — as Burke knew them and from which he built his theory of political economy.

How Burke would have dealt with these new arrangements can only be guessed, though it’s safe to presume he would have come at them from a point of humility and humanism.

Read more about Edmund Burke and the political economy.

Read more from the great philosophers series.

The Value of $100 in Every U.S. State

The Tax Foundation has issued its annual report on what $100 gets you in each of the 50 states. It’s a great reminder of the cheapest and costliest places to live, and also provides some additional insight into why a national minimum wage doesn’t really make sense.

The map shows what the value of $100 is in each state, so if a state lists a value of $101, you’re getting a 1 percent bump on your money. If a state lists the value as under $100, the cost of living there exceeds the value of the bacon you’re bringing home. The data are based on 2014 numbers recently released by the Bureau of Economic Analysis.

Tax Foundation Value of $100 by State

As you can see, it really may be like living in paradise, but when it comes down to Hawaii’s value, $100 won’t get you very far. That’s the most expensive state in the nation. Residents of the District of Columbia, not technically a state, fare even worse, which is sad considering it doesn’t have the weather, the waves, or the way of life as Hawaii, but at least you can rub elbows with the people deciding how to spend dollars that were formerly yours.

Conversely, if you’re not making a lot of money in Mississippi, you may still be doing all right since $100 goes further there than in any other state in the nation. Similar circumstances for South Dakota, which is also sparsely populated — it’s 46th in population but 17th in size — so you could probably get a good deal on land.

As Alan Cole at the Tax Foundation explains it, the state-by-state differences are stark.

Regional price differences are strikingly large; real purchasing power is 36 percent greater in Mississippi than it is in the District of Columbia. In other words, by this measure, if you have $50,000 in after-tax income in Mississippi, you would have to have after-tax earnings of $68,000 in the District of Columbia just to afford the same overall standard of living.

So guess which state is more economical to live in, Nebraska or California? Yeah, we didn’t think you needed a cheat sheet for the answer to that. In all, one key to living large is to find the state with good salaries but not high costs of living.

Read more of the Tax Foundation’s report on the Value of $100 by State.