Minimum Wage Hikes Part II: Washington State Strikes Back

Back on Valentine’s Day, I posted about the link (or lack of one) between a proposed hike in the federal minimum wage and unemployment levels. I know…not a very romantic post for Valentine’s Day. I got several questions, so I thought I’d expand on them and do a couple follow-ups with a bit more information. To recap, basic economics would suggest that as the minimum wage increases (the price of labor), the consumption of labor (employment rate) would decrease as employers consume less of it. The problem though is that a good deal of research shows that this relationship doesn’t exist.

In my initial post, I referenced Washington and Oregon as two states whose minimum wages were already above or near the proposed $9/hour federal minimum. So the question is…how have they been doing? Has that higher minimum wage meant higher unemployment? Well, looking at December 2012 data from the Bureau of Labor Statistics, Washington (who’s minimum wage is $9.19 per hour) has a seasonally adjusted unemployment rate of 7.6%. That’s ties them with Colorado and Tennessee for 30th place, but all are below the national average. Oregon (minimum wage is currently $8.95 per hour) has an unemployment rate of 8.4%, putting it 39th. As comparison, Rhode Island and Nevada are tied for last with 10.2%, and North Dakota is first with 3.2%.

But back to Washington and their $9.19/hour…have they been worse off because of it? To gain some insight, we reached out to a regional economist with the Washington Employment Security Department to see what the situation looked like on the ground in the Evergreen State. What we heard was that there wasn’t any apparent correlation between the minimum wage and unemployment. In fact, it was industry structure (the Pacific Northwest is home to a lot of logging and timber business, which tends to suffer when the housing and construction industries tank) that was a more important determinant. Washington’s job losses and recovery have been fairly close to the national average throughout the recovery.

The downturn hit manufacturing and construction most heavily; however, minimum wage jobs aren’t very prevalent in either of these industries. Manufacturing came booming back, thanks to the aerospace industry (sonic boom?), plus the Seattle area has heavy hitters like Microsoft and Amazon, which have done well…and don’t pay too many people minimum wage. What we heard was that only about 3% of the jobs in Washington pay within 20 cents an hour of the minimum wage, and about two-thirds of those jobs are in retail, agriculture, and restaurants (primarily fast food).

Oregon saw much the same story on the way down, but hasn’t recovered as quickly, primarily because it lacks the swing that Boeing and Microsoft make up. But again, it wasn’t minimum wage jobs that were hit particularly hard during the downturn.

So, in answer to the question, how is unemployment in high-minimum wage states like Washington and Oregon? All in all, pretty good. Keep in mind too that Washington is doing this without a state income tax, and Oregon doesn’t have sales tax…so that means more money in pockets, which can’t hurt.

Big thanks and shout out to Scott Bailey in the Vancouver office of the WESD!

  • Jason

    Robin –

    I guess I would posit that if there is no discernible link between unemployment and raising the minimum wage then employers must be either accepting reduced profit margins or they’re passing along the increased labor costs to their customers through price increases. Otherwise, if there were no economic costs of raising the minimum wage why not increase it to $20, $50, or even $100 an hour so everyone would have more cash in their pockets to spend on imported goods??

    You note that the majority of jobs paying near minimum wage are focused in the retail, agriculture, and restaurant sectors, specifically Fast Food. I would imagine that increased labor costs will hasten the demise of the “Dollar Menu” at many fast food chains, granted rising raw material costs have already significantly shrunk the size and offerings of “Dollar Menus”. Maybe when the dollar menu is finally made unprofitable by the Federal Reserve’s inflation of the monetary base the America plebs will begin to ask questions about the wisdom of conjuring up $85 billion a month to purchase Treasuries and MBS junk from the banks.

    • Robin Anderson, Economist, Principal Global Investors

      Thanks for reading and thanks for commenting. Literature has found that the costs are being passed on to consumers with higher prices. In addition, employers may cut wages of workers making more than minimum wage. Or additionally, labor costs are reduced with less employee turnover. More on this in my first post on minimum wages.