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Doomsayers Keep Getting It Wrong on Higher Minimum Wages

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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In 2014, Seattle passed an ordinance to eventually raise the minimum wage in the city to $15 an hour, giving the Pacific Northwest city the highest pay floor in the U.S.

The ink wasn’t even dry on the wage legislation when the dire warnings of economic collapse began. Unemployment would skyrocket, economic growth in the state would be hurt, restaurants and small businesses would close en masse. The deserved punishment would be swift and harsh.

But a funny thing happened on Seattle’s way to economic collapse: the city thrived. Restaurants didn’t close -- they actually prospered -- and new restaurant openings rose. Unemployment fell, most recently to less than 4 percent, more than a full percentage point lower than the national rate. By all accounts, the city on the Puget Sound is booming.

How did the doomsayers get it so wrong? As in so many other cases of politically motivated economic analysis, this was what the opponents hoped would happen because it fit with way they think world should work. But given what we know about Seattle (more on that in a bit) higher minimum wages can improve workers’ living standards and stimulate the local economy.

Blame a fundamental misunderstanding of minimum-wage economics and, of course, good old-fashioned political bias. There have been repeated attempts to misread the data and conclude it has hurt employment, but so far none of this research has withstood scrutiny.

Much of the history of the debate on minimum wage traces to a famous 1993 paper by Alan Krueger and David Card that looked at what happened to employment in the fast-food industry when minimum wages were raised in one market but not in an adjacent market. They found no reduction in job growth in the market where pay was increased; in fact, the opposite happened. The economic lesson was that modest increases in minimum wages don’t hurt employment, and tend to increase economic activity.

Why did so many economists get this wrong? They looked at the micro and ignored the macro. In the basic model of supply and demand, an increase in the cost of something reduces demand. This may be true in an isolated laboratory setting. But when minimum wages went up in the real world, it affected not just the parties to that transaction, but the regional economy. By considering only the relationship between employer and employee, the dismal-science set was focusing too narrowly. The critics failed to consider the impact of lower-wage employees earning more money; these folks typically spends almost everything they earn, which means that when they’re paid more it goes right back into the local economy.

Krueger and Sands’ conclusion has been confirmed by subsequent studies, and has withstood the test of time as a research finding.

But before we start cranking up minimum wages everywhere, there are some qualifiers that need to acknowledges: Seattle is a major boomtown, with some of the most dynamic and vibrant companies and industries in the nation. It not only is one of the fastest-growing cities in the country in terms of population gains, it also has one of the fastest-growing incomes of any city, with median household income of more than $80,000.

We’re not talking Detroit here.

Other cities that have raised minimum wages -- San Francisco, New York, Los Angeles and Portland, Oregon -- are also in the higher-paying economically prosperous coastal regions. When minimum wage increases are implemented intelligently, it is a relatively minor issue for the local economy to absorb the added costs. As I have noted before, it often works out to be a net positive. We have even seen some evidence that raising minimum pay is working to the advantage of Wal-Mart.

Some time ago, I suggested that we would eventually learn whether higher minimum wages were going to kill jobs. The early data is in, and so far it doesn’t look like they do.

(Corrects David Card's last name in sixth paragraph.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Barry Ritholtz at britholtz3@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net