Effects of the Proposed 1999-2000 Washington Minimum Wage Increase
Dr. David A. McPherson, October, 1998
by Paul Guppy, Vice President for Research, Washington Institute Foundation
I. The Current Minimum Wage
Washington last raised the state minimum wage on January 1, 1994, lifting it to the current $4.90 an hour for workers age eighteen and older. The last effective minimum wage increase, however, actually occurred much more recently. On September 1, 1997, federal law boosted the minimum wage for all states to $5.15 an hour. Since most employers in Washington must pay the higher of the state or federal minimum wage, the state minimum wage ceased to have much effect.
Passage of Initiative 688 will therefore result in the second raise in the state's effective minimum wage in sixteen months. In addition, Initiative 688's unique inflation provision means that, if passed, it could be the last minimum wage measure ever put before the voters of Washington.
II. Provisions of Initiative 688
Initiative 688 would amend Title 49.46.020 of the Revised Code of Washington and increase the state's hourly minimum wage to $5.70 on January 1, 1999. The measure then provides for a further raise to $6.50 on January 1, 2000. After that the minimum wage would rise automatically every year based on the consumer price index for urban wage earners and clerical workers calculated on the previous September 30. The first inflation-adjusted increase would go into effect on January 1, 2001, with further automatic increases imposed on the same day every year indefinitely. This would be the nation's first self-enacting, statewide minimum wage increase ever.
Taking inflation into account since the last increase in the state minimum reveals just how large the jump proposed by Initiative 688 would be. Calculating from the 1994 increase, the state minimum wage today would be $5.39 if adjusted for inflation, 5.4% less than the $5.70 proposed by Initiative 688. Similarly, the same state minimum wage adjusted for inflation would be $5.58 in 2000, considerably lower (14.2%) than the $6.50 Initiative 688 would put in place that year.
III. An Earlier Effort: Senate Bill 6577
The push to pass Initiative 688 grows out of an attempt earlier this year to pass Senate Bill 6577 in the state legislature. The provisions of Senate Bill 6577 closely reflected those of the current initiative, providing for a two-step increase in the minimum wage over two years to $6.50 an hour, with permanent inflation-adjusted increases every year thereafter. Although strongly supported by labor unions and Governor Locke, the measure fell short of the backing needed to pass the legislature. Supporters then pursued the measure as a ballot initiative. Major organization and support for Initiative 688 comes from the Washington State Labor Council, AFL-CIO.
IV. The Broad Economic Impacts
The provisions of Initiative 688 amount to a 32.7% increase in the state minimum wage over two years, about eight times the present rate of inflation. This would move Washington to the top, with Oregon, as having the highest minimum wage in the nation. Washington's minimum wage would be $1.35, or 26%, higher than the federal minimum.
It would also put Washington in an unfavorable position when compared with nearby states that may compete for new economic growth. Regional states with more competitive minimum wages are: California ($5.75), Alaska ($5.65), Hawaii ($5.25), Idaho ($5.15), Montana ($5.15), and Nevada ($5.15). In all, the measure would make Washington one of only eight states nationwide that impose minimum wages higher than the federal level, placing our state at a competitive disadvantage to 42 other states in attracting new businesses.
V. Impacts on People
Supporters of raising the minimum wage point to how it will benefit workers currently earning the minimum. A higher minimum will also create upward pressure on all wages, as workers now earning above the minimum ask for commensurately higher pay. Those employees who continue to have jobs at or near the minimum wage level will clearly benefit if their work hours remain constant. Any reduction in work hours, however, would offset the income benefits of a higher mandated wage.
But, like any public policy choice, an increase in the minimum wage involves trade-offs, with some citizens benefiting and others bearing the burden. Dr. Macpherson's study shows how changes in the minimum wage creates winners and losers, and measures the impact on each based on the proposal now before the voters.
A. Impact on Jobs
The largest negative impact would be job loss. There exists a rare and nearly unanimous consensus among economists that increasing the minimum wage causes unemployment.
Dr. Macpherson's analysis finds that 7,431 jobs in Washington state would be destroyed by the proposed increase (see page 6).
About 45.9% of the expected job loss would occur in the Seattle-Tacoma metro area; about 12.4% would occur in the Spokane area (page 15).
B. Impact on Low-Income and Unskilled Workers
Any government-imposed change in our economy, such as taxes, regulations, or mandated prices, carries a social cost, and an important question is who will bear that cost. In the case of imposing a higher minimum wage, it is generally assumed the cost is borne by employers. But employers faced with any new tax or regulation have two choices: They can either raise prices to reflect the increased cost of doing business, or reduce costs by laying off workers and freezing hiring. Depending on the business, the market may not permit a rise in prices, so lost work and fewer job opportunities, especially for the poor, inexperienced and unskilled, will be the result.
Instead of meeting the higher cost of paying workers, some employers will cut back on work performed, eliminate less profitable services, and substitute machines for some of the work now provided by paid employees. As experience in Europe has shown, high mandated wages and high unemployment go together.
The average family income of workers affected by the minimum wage would increase by only 2.8% (page 5).
But more than half the layoffs will hit families with annual incomes of less than $30,000 (page 6).
C. Impact on Young Workers
Raising the minimum wage will make it harder for young people to get the most important job they'll ever have -- the first one. Initiative 688 will have a disproportionate impact on unskilled workers with little on-the-job experience. While higher education is greatly valued in our society, not every young person goes to college. Many enter the workforce right out of high school, or even begin working before they graduate. For these young people that first job is all important. It solves the classic paradox that any new applicant faces: It is more difficult to find work without experience, and you cannot get experience without that first job. All-important entry level positions give new workers a chance to prove themselves and to secure the skills, habits and good recommendations they need to move up to the next and better job.
The point is well illustrated by a recent study from the Organization for Economic Cooperation and Development. The OECD found that in nine countries imposing higher minimum wages from 1975 to 1996, a 10% increase in the government-mandated rate reduced teenage employment by between 2% and 4%. In the United States, this effect would serve to worsen the already high youth unemployment rate. In 1997, joblessness for Americans under 25 averaged 11% nationally, three times the rate of older workers.
Young workers who cannot convince an employer to hire them at a wage above the current minimum will not be helped by a law that won't even let them start at less than $6.50 an hour. The effect of Initiative 688 for these workers will be to saw off the lower rungs of the ladder of employment opportunity.
29.7% of workers affected by the minimum wage increase live with their parent or parents (page 4).
More than half the projected job loss will be confined to workers under age 25 (page 1).
D. Impact on the Most Vulnerable
Similarly, raising the minimum wage adversely impacts the most vulnerable in our communities. Everyone else who may be affected by the higher fixed price for labor -- employers, consumers, and higher-paid workers -- have the resources to adjust to the government-enforced change. Low income workers, and poor, out-of-work job seekers have the least ability to adapt to government policy shifts that may negatively affect their lives.
An increase in the minimum wage puts at risk important advances Washington has achieved in recent years in reducing welfare dependency. Rising wage costs places out of reach what is arguably the most effective social welfare benefit: a job. Through a change in government policy, many needy Washingtonians will be simply priced out of the labor market. A higher minimum wage will make it even harder for these individuals to find job opportunities that are right for them.
The jobless rate for people living with developmental disabilities is 16 times the national unemployment rate of 4.7%.
A disproportionate share of the job loss will fall on black and Hispanic workers (page 14).
E. Impact on Inflation
Through its singular inflation provision, Initiative 688 may have a much larger long-term economic impact than voters might intend. Automatic annual minimum wage increases will tie the hands of future voters, legislators and governors by locking in an inflexible policy for which no one is accountable.
It will make it more difficult for policymakers to respond to unforeseen economic conditions such as a return of double-digit inflation or super high unemployment levels. As noted, an increase in the minimum wage tends to boost all wages. When the next period of sharply rising inflation occurs (which is inevitable at some point), linking minimum wage increases directly to the inflation rate will only make the inflation spiral worse.
The proposed increase will cost Washington employers an estimated $204 million a year, much of which could be passed on to consumers in the form of higher prices (page 7).
Initiative 688 will have a disproportionate impact on rural areas because inflation increases are tied to the urban consumer price index. About 30% of the projected job loss is expected to occur in non-metro and small metro areas (page 15).
By government fiat, Initiative 688 would raise the price of entry-level jobs. Not surprisingly, it is reasonable to expect new entry-level jobs to become more scarce and for some current entry-level jobs to be eliminated. For the first time, this study measures the job loss that would occur. Using U.S. Department of Labor data, Dr. Macpherson's study measures the precise human and economic effects Initiative 688 will have in Washington state.
Overall, Dr. Macpherson's study indicates that raising the minimum wage may in fact create some jobs -- for unemployment counselors.
About the Authors
Dr. David A. Macpherson is Professor of Economics and Research Director of the Pepper Institute on Aging and Public Policy at the Florida State University. His specialty is applied labor economics. His current research interests include pensions, discrimination, industry deregulation, labor unions, and the minimum wage.
He is the author of many articles in leading labor economics and industrial relations journals including the Journal of Labor Economics, Industrial and Labor Relations Review, and the Journal of Human Resources. He is also co-author of the annual Union Membership and Earnings Data Book: Compilations from the Current Population Survey published by the Bureau of National Affairs. In addition, he is co-author of the undergraduate labor economics text Contemporary Labor Economics as well as the forthcoming book Pensions and Productivity. He received his Ph.D. from Pennsylvania State University in 1987.
Paul Guppy is a graduate of Seattle University and holds graduate degrees in government and political science from Claremont Graduate School and the London School of Economics. He completed 12 years as a legislative aide in Washington, D.C., seven as a Legislative Director in the United States Congress, before joining the Foundation this year as Vice President for Research. He is the author of "Property Tax Relief in Washington: Is Referendum 47 Working?" and "A Citizen's Guide to Initiative 200," both published earlier this year by the Foundation.
The Employment Policies Institute is a nonprofit research organization dedicated to studying public policy issues surrounding employment growth. In particular, EPI research focuses on issues that affect entry-level employment. EPI research has quantified the impact of new labor costs on job creation, explored the connection between entry-level employment and welfare reform, and analyzed the demographic distribution of mandated benefits.
EPI can be reached at: Suite 1200, 1775 Pennsylvania Avenue, N.W., Washington, D.C. Telephone (202) 463-7650; Fax (202) 463-7107; www.epionline.org.