Minimum Wage In Seattle – Increases labor costs, mildly reduces demand for low-wage jobs, but doesn’t increase prices

In this paper we revisit the question of how businesses respond to the minimum wage using evidence from a large minimum wage hike in Seattle. In 2014 the City of Seattle passed the Minimum Wage Ordinance, which raised the minimum wage to $15 over several years. We examine the minimum wage effect during the first two phase-in periods, when the minimum wage went from $9.47 to $11, and then to $13.1 We focus on two questions: 1) Did employers use the labor market or the product market as the primary channel of adjustment to the minimum wage? and 2) What was the role of the intensive margin effect (within-firm adjustment of the surviving firms) versus the extensive margin effect (business entry and exit)?

We show that the minimum wage affected businesses both at the intensive and extensive margins. At the intensive margin, businesses increased their labor costs and adjusted to the minimum wage by mildly reducing demand for low-wage jobs, but they largely did not pass the increase in labor costs to prices. At the extensive margin, the minimum wage led to higher rates of business exit and shifted the composition of entering businesses towards less labor-intensive businesses. Finally, we find that the extensive margin and the intensive margin effects were of the same order of magnitude, and were equally important for understanding the impacts of the minimum wage.

Chosen excerpts by Job Market Monitor. Read the whole story at “Payroll, Revenue, and Labor Demand Effects of the Minimum Wage” by Ekaterina (Roshchina) Jardim and Emma van Inwegen