$15 an Hour in Seattle

Happy New MinWage Day in Seattle!  April Fool’s Day seems a most appropriate time to launch Seattle’s grand economic experiment with forced wage levels.  A specific schedule for an eventual 58% increase in the minimum wage required in that city now goes into effect, to be fully implemented in a few years.

Today, all large employers in Seattle must pay at least $11 an hour to their least valuable lowest paid workers.  They also must begin ratcheting pay upwards each year until they meet the scheduled rate of $15 an hour by 2017.  That is more twice as much as the U.S. Federal minimum wage of $7.25.  Small employers must meet an $11/hour minimum city standard, “only” about 52% above the Federal minimum wage but “merely” 16.2% above Washington State’s current $9.47/hour highest minimum wage in the nation. 

No, this is NOT a joke. 

Labor economists can be expected to salivate with excitement at the prospect of a living, breathing laboratory experiment conducted in one of America’s most politically correct large cities.  Driven by an outspoken (some would say demagogic) Marxist Trotskyite Socialist City Councilwoman, the Emerald City has leaped into the unknown.  Seriously, folks, this is pure proof of the old axiom about reality frequently being stranger than fiction because reality doesn’t have to be believable.  Reality just is what actually happens.  And this did.

Theories only remain theories until tested in real life applications.  That starts today. 

In years to come, it is likely that arguments will still continue about the effectiveness of this unique initiative.  Even long after a major economic change, certainty about the actual effects from specific causes may remain elusive.  Research analysts, politicians and polemicists typically point to measurable results from different study periods to support their various contentions.  Just look up studies about JFK’s Space Race, LBJ’s War on Poverty, Nixon’s Wage-Price Freeze and Reagan’s Trickle-down Economics to see what I mean about retrospective analyses made from special perspectives.  Motives frequently affect investigative findings. 

Compensation people are particularly well versed in the various techniques of selectively choosing observation samples for careful analysis, of course.  So it may not surprise us if the future inferences drawn and conclusions offered about this unprecedented municipal forced minimum wage increase program prove as variable as …well,  …maybe the definition of  "fair" pay.

Predictions about eventual outcomes range from enthusiastic to dire.  Results have already started to appear.  More will follow soon.

We certainly do live in interesting times, when new pay laws impose dramatic and potentially expensive costs on employers.  This is no longer a question of “what if?”  It is real in Seattle.  Let’s see what happens.  Lay your bets now!

E. James (Jim) Brennan was Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he lives just North of Seattle, has pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.

Image "Piggy Banks in a Row" courtesy of ddpavumba/FreeDigitalPhotos.net

Comments

[Trevor Norcross]

Hi Jim,
I spent the last 7 years in Seattle. The problem with this "experiment" is that it is not a good gauge to argue for this approach on a national level, which is what many will want to do. Seattle, as with any large city, is not a self contained environment. It does not grow, manufacture, or create everything it consumes to create the potential price inflation, and at the same time it may not be big enough to create the economies of scale to usher in more automation to eliminate many of the entry level jobs.

The concern with this approach on a national level is that it would then create the financial motivation to automate away many of the entry level jobs and push other jobs that are starting to come back on-shore off-shore again.

We live in a global economy where lesser developed countries are more than happy to provide less expensive labor. And, the automation technology exists to eliminate a large portion of the labor force and that financial tipping point is getting closer and closer.

I predict they will find a way to call it a success but the sample size is not significant enough to extrapolate to a national scale.

[E. James (Jim) Brennan]

Sensible forecast, Trevor. The OTHER Washington (as in DC) might be an even better example of the nonproductive metropolitan area you describe. Would not be surprising if they soon follow on the same path, since there probably are not many minimum wage workers there, anyway. Plus, fewer of their jobs could be offshored. I'll make no further comment on that!

[Tony Bergmann-Porter]

My prediction - along with the bottom tranche of the Seattle labor force, a large number of bien-pensants are about to learn that the true minimum wage is $0.00.

[Tony Bergmann-Porter]

"In years to come, it is likely that arguments will still continue about the effectiveness of this unique initiative. Even long after a major economic change, certainty about the actual effects from specific causes may remain elusive."

Quite so; to this day the Keynesians and neoclassicists are squabbling about 1929 - 1945.

[E. James (Jim) Brennan]

Those who make such "dire" predictions should note the many hyperlinks I included that offer far rosier forecasts. Yes, the aggressive relative increases are stunning in today's world of 3% forever lassitude, but it is a fascinating and courageous experiment.

Check the links I posted for confirmation of every statement made, including the political self-identification of the measure's flamboyant sponsor who was opposed by both major parties. This is real, not a made-up tale or some slanted gibe. And it's too important to be funny. It might be a jump-start to something bigger.

[Karen Kervick]

Several things come to mind:
Microsoft and Microsoft employees who can afford to pay $5.00 for a cup of coffee every day. What Microsoft pays drives up all technology companies' wages.

Seattle's housing prices are above average because their salaries are above average. It stands to reason that the average lowest wage is above average.

I'm all for the restaurant that is including "tip" in their base pay and covering the cost in their prices. The European model, seems to work over there. If someone gives a tip on top of the price does that all go to the server? Then the server can still differentiate themselves to earn more, but may not and could become frustrated. Flip side they don't have to worry about the tightwad who won't tip regardless.

Have we changed the definition of what an entry level minimum wage job is?

In my world of job descriptions, it's the job content that determines the value in comparison to the market and internally to other jobs. But in looking at internal value do you start at the top and work down or start at the bottom and work up?

I don't think the Seattle experiment is something that could be replicated nationally and have the same results everywhere. It should be unique to each environment. Ideally business owners should decide to do the right thing per their bottom line. Wouldn't all small business owners like to pay more if they could?

[E. James (Jim) Brennan]

Thanks, Karen, for a thoughtful response. I share many of your perceptions and likewise find many unanswered questions here. Note that the final four hyperlinks in my article specifically address some of the variety of opinions dealing with the potential effect on restaurant and service industry entry jobs. Perhaps this experiment will provide some real answers.

[Jules]

I would not bet on less developed countries being a sustainable business model seeing how some of these countries have double digit annual increase budget and spend. While the US stays at 3%, countries like India are moving their salary at about 12% (It's double digit but I can't recall how high it really was). It would not take long for the rest of the world to catch up.

[E. James (Jim) Brennan]

Karen raised an interesting point when asking if internal value is set from the top down or from the bottom up. At first thought, it seems to make little difference, since minimum wage is a floor threshold established by law and not by external economic reality or internal subjective custom. Also "internal value" is specific to the enterprise, variable via evolving consensus and fundamentally unverifiable. MinWage levels are the opposite and have a leveling effect on all "least valued" positions.

[Karen Kervick]

In the industries in which I have worked, the legal minimum wage was never even considered as a factor in what we would pay, except perhaps in the pay of minors. We just knew in the back of our minds that we had to be above the legal threshold. Market conditions, especially what the local competitors were paying, drove our rates. In one company I worked for, outside factors drove the rates of the lowest level positions and those positions with shortages, such as nurses and wait staff. The higher level positions were kept moderate in comparison due to the industry and budgets, possibly board pressures. We paid competitively but it was known the job was more of a calling and not the highest paid one in the land. I think the feeling could be captured as "If the CEO is not making top dollar, then I understand I will not be making top dollar and I'm okay with that because I am working in an industry that takes care of people." But as top management earns more, that does trickle down to the next level of management. And as people move up the ladder they expect pay increases to match. In an organization that pays its CEO at the higher end of the market, I feel you have more employees expecting to share in the wealth. "If he gets x, why shouldn't I get y?"

Internal value is certainly specific to the enterprise. I think the value is top down, at least to a point in the organization. The higher level positions are viewed more from an internal value and compared to peers when establishing the value, while lower level positions are viewed more to market and at what rate they can find willing candidates. We still don't look at the legal minimum wage though for setting our standards. We look at what the local market is paying. So if our local market set the rate at $15.00/hour we would have to follow suit. (legal or not because it is the local market) But increasing the lowest levels would only impact those positions in the low to middle range of pay. Not those influenced more by the internal value of the top tier.

I believe that is what you expressed in your last sentence, Jim.

[E. James (Jim) Brennan]

Yep, you got it in one, Karen. There is no economic ability to internally rank all the jobs whose pay rate is legislated rather than freely set by the employer. Some minimum wage jobs may be truly less valued than others, but the minwage is a bottom threshold floor that collects all individuals who cannot qualify for (or attain) higher valued work.

On your point about the "only impact" being on low range earners, all should remember there will always be a ripple effect when the x-axis intercept is raised. Everyone who has progressed beyond the old minimum must be boosted to the new minwage required by law, and those who have advanced a bit above them will successfully argue for competitive adjustments due to pay compression. Like pond ripples, the amplitude gradually diminishes and disappears, but it creates payroll costs far exceeding the "mere" raises legally required to folks at the old minwage alone. The bottom-dwelling categories swell with more incumbents more tightly crowded into the ranks of low earners desperately vying for advancement opportunities. It reduces the company's capacity to differentiate between their lowest paid workers, thus discouraging them and hurting morale. A sad situation.

[E. James (Jim) Brennan]

This topic continues to resonate, per http://finance.yahoo.com/news/protests-15-hour-wages-set-112152734.html and other developments that prove it has "legs."

[Karen Kervick]

And now we have $70,000 salaries planned in Seattle.

http://money.cnn.com/2015/04/14/news/companies/ceo-pay-cuts-pay-increases/index.html

Price of coffee is going to go up.