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The Weeds: a controversial new study raises even more questions about the minimum wage

A controversial study out last month suggests that a recent minimum wage hike in the city of Seattle may have caused job loss and hour reductions for low-wage workers, ultimately possibly reducing “low-wage employees’ earnings by an average of $125 per month in 2016.” This data, from the University of Washington, was widely reported to have contradicted more than 20 years of studies showing that incremental increases to the minimum wage actually benefit workers.

In this episode of The Weeds, Vox’s Ezra Klein, Matt Yglesias, and Sarah Kliff break down the researchers’ results, debate the economic merits and drawbacks of raising the minimum wage in Seattle from $9.47 to $15 an hour over three years, from 2014 to 2016, and discuss the problematic aspects of the study’s methodology. For example, the researchers’ “synthetic Seattle” statistical model, used as a baseline to suggest what might have happened in Seattle without the wage increase, excludes 45 percent of the relevant job market, according to critics of the study.

In the episode, Matt brings up a pivotal question at the core of the wage debate: What are you trying to accomplish with a pay increase? Ezra outlines the economic angle that minimum wage increases hurt small businesses and favor large multi-state companies, which can afford to pay employees more and swallow any profit losses.

Sarah, a former Seattle resident, adds that wage changes can effectively alter the structure of a city as a whole — she says businesses began clustering outside the Seattle city limits in the nearby Bellevue, Washington, to take advantage of the lower wage rates. (Matt previously wrote about this possibility in 2014.)

In addition to the minimum wage debate, Ezra outlines his theory on the Donald Trump Jr. email scandal — it’s political incompetence coming back to bite the Trump family. Sarah also discusses some predictions for the Senate Republican health care bill, released Thursday.

You can listen to the episode here, or subscribe to the show on iTunes here.

Here’s Ezra talking about his model of why a higher minimum wage can help low-wage workers and what the government’s role is in the debate:

The way I think about the minimum wage is that low-wage workers — particularly replaceable low-wage workers — have very little bargaining power, and so they're not able to extract as much of the value that they're creating as higher-wage workers who are in a more competitive talent economy. They're easily replaced — and there is a skill difference for people at low-wage work too, I don’t want to in any way diminish that — but if there are more people who can do your job. And if your job is pretty rote, if you’re just operating a fryer at McDonald’s — not to say that isn’t a difficult job, but more people can do it — then it’s harder for you to go in and say, “You’ve got to give me a raise or I’m walking,” because they might say, “Okay, well, then walk."

So in that case [...] the government — state government [or] federal government — is acting as your negotiator. Unions have other roles too, but it's almost acting as your union, it’s just saying, “We are increasing your bargaining power artificially. We are saying you have to be paid this much.” And so the place where a minimum wage increase is very valuable, is where you think there’s a delta in between the value low-wage workers are creating and how much their employers could be paying.

So you think the employers have basically won the negotiation — are pocketing more of the gains, giving them to shareholders taking them out as profits, taking them out as compensation for executives, possibly reinvesting them in the business, they do other things too — but you think it would be good to shift some of that toward workers. And so you have a minimum wage increase, and you shift some of that toward workers. Maybe it comes out in prices, maybe they just swallow it and it comes out in lower profits, but that’s what you do.

I think something that follows from that theory, I think something that is likely within it, is that bigger, more successful businesses are both stronger negotiators and have more of a delta with their low-wage employees. So I think it is likelier that Walmart — they have been increasing pay in recent years a bit, but using them as a stylized example — Walmart has space to pay its workers more, in a way that my corner store cannot or may not, I don’t know for sure.

And so if you begin to increase the minimum wage, you might actually really get Walmart workers a raise, but you might also hurt the corner store, and if you do that a bunch of different times, what you're doing is systematically advantaging larger employers. This cuts against a different thing that progressives feel, which is a generalized preference, I find, for small businesses over big. But when you look at how workers are treated, big businesses tend to have more benefits, particularly lower on the pay scale; big businesses often pay a little bit more. So there’s a little bit of a conflict between people’s intuitions and what you see in labor market data here.

Show notes: