The old joke goes that if you laid all the economists in the world end to end, you still wouldn’t reach a conclusion. A little unfair maybe, but for those keeping track of the argument around two recent – and conflicting – papers on the move to a $15 minimum wage in Seattle, it probably doesn’t seem too wide of the mark.
Others – including 538, New York Times, Washington Post, former White House adviser Jared Bernstein and the Economic Policy Institute – have had their say on the rights and wrongs of these papers, one of which found no impact on employment and the other which pointed to job losses for lower earners.
The big question on this side of the Atlantic is what it means for the National Living Wage (NLW) and jobs. Here’s what we should and definitely shouldn’t learn.
First, some context. The ratcheting up of the wage floor in Seattle is in part a result of the Obama administration’s failure, though not for want of trying, to push through an increase in the federal minimum wage, which has been stuck at just $7.25 for nearly eight years. This stagnation has led to more and more states and cities taking the minimum wage into their own hands.
As a result, many studies on this new batch of increases in the US compare what happens in the area where the minimum wage is rising with somewhere – ideally close by and economically similar – where the wage floor stays the same. This aims to prove or disprove the idea that employers, especially those close to the border between the two minimum wage regimes, relocate across the border taking their jobs with them.
But in the UK we have a national minimum wage system so the risk of relocation is far lower. While some jobs in, say, factories could be offshored, many low-paying roles can’t be moved away easily, like baristas or supermarket staff. If the entire country is having to respond to a change, rather than a single city, the way companies react is likely to differ.
A second important consideration is the minimum wage’s ‘bite’. Put simply, if the wage of the typical person in an area is high, the minimum wage there can be higher too. That’s why talk of a $15 federal minimum wage has caused discomfort even among some of those who support some increase. The latest data from Seattle suggests that while the minimum wage was $13, the median wage was just over $23 an hour. That’s a bite of about 56 per cent. Applied in Birmingham, Alabama, where the median wage is $17 and the bite would be 76 per cent. That would be a very different proposal.
Coincidentally, the current bite of the NLW is roughly the same as in Seattle. But there’s much more variation in the UK’s labour market. In April 2016, the NLW had a bite of 46 per cent in London but 68 per cent in Northern Ireland. That means that if a bite of 56 per cent is causing significant job losses in Seattle, and most of the research here finds little or no evidence of a similar negative impact, there are other labour market factors at play and US-UK comparisons may be of limited value.
Third, the target and pace of minimum wage increases need to be seen in a wider economic light. Seattle’s economy has boomed over this period. The UK is at record employment rates and unemployment is as low as it’s been for decades. Now is as good a time as any to put through sizeable increases. However, for some big employers in Seattle they’ve faced a 36 per cent nominal increase over the past two years. In the UK, it’s been 15 per cent. That’s a meaningful difference in pace.
What happens next is also key. The NLW is set to rise to 60 per cent of median earnings for those aged 25+ by 2020, currently on course to be £8.75. After that it will rise in line with median earnings, meaning if those in the middle are doing well then so will those at the bottom. In Seattle it’s going to $15 with smaller employers on a much slower trajectory than big ones. From then on, it will rise in line for prices. What these differing paths mean for employment and how employers plan and adjust isn’t clear but it is important.
Of course, none of that means future analyses of US cities with big increases planned or underway – including Seattle, New York, San Francisco and Los Angeles – won’t make for fascinating reading for minimum wage watchers on this side of the pond. The NLW is an ambitious policy and will mean significant changes for some parts of the economy. But there are big differences between the minimum wage rises taking place here and in the US. Because of that, it’s studies for the Low Pay Commission that are by far the best guide to what’s happening here. And while probably not every economist will unequivocally agree, their summary of the minimum wage’s impact since its introduction is that it has achieved its goal of raising wages without damaging employment. A combination of continued close attention from researchers and a more proactive approach from government to help lower-paying parts of the economy should mean that the NLW can continue to boost the wages of millions of workers.