Last month the city of Seattle enacted a new much talked about minimum wage ordinance that brings wages within the city to $11 per hour immediately and up to $15 per hour within the next three to seven years, depending on the size of the company. This is a sixteen to sixty percent increase over Washington state’s minimum of $9.42 and puts Seattle at the highest minimum wage in the country.

No doubt this will be a boon to workers within the city that can hold on to low wage positions, but how will this change effect employment numbers within the city? The laws of supply and demand dictate that at a higher price floor, the amount of labor that the market can support will decrease, so there is little doubt that there will be some layoffs, or at least a tightening of new hires. It has been argued in the past that small changes to the minimum wage rate have not had much of an effect on the unemployment rate, but at up to sixty percent this is no small change. So as an economist my question is, exactly how big of a hit is the unemployment rate going to take?

In order to answer this question I have used statistical regression techniques on a dataset I have pulled together from various government sources that consists of almost twenty years worth of panel data organized by state. I tracked down data on historical minimum wage rates, unemployment rates as well as GDP as an indicator of the economic environment that these other indicators exist in. I used statewide data to conduct my study rather than city level for two reasons. First statewide data for all three of these figures was more easily available than city data, and second because states have more solidly defined borders with their neighbors, I believe that this data would be easier to measure and therefore more reliable as far as accuracy goes. Of course using statewide data to measure the effects on a single city will mean keeping a few extra things in mind when analyzing my model’s actual prediction, but I’ll get to that in a bit.

As for my actual statistical model, I don’t feel the need to get too technical regarding the details here, but I will say, in case anyone is curious, that it predicts the unemployment rate based on past unemployment, per capita GDP and the going minimum wage rate. It takes into account things such as heteroskedasticity, first order auto-correlation and fixed effects between groups (in this case separate states) over time.

What my model predicts is that for a change in the minimum wage the size of what Seattle is undergoing there is a ninety five percent chance that the unemployment rate within the city will rise by between 2.7% and 3.9%. What this means in practical terms is that with a labor force estimated at roughly 422,000, Seattle can expect to see between 11,300 and 16,700 more potential workers out of jobs after this change is fully implemented than before this ordinance went into effect. According to a study done by the University of Washington a whole twenty four percent of Seattle’s workforce earns less than the new $15 per hour minimum, over 101,000 workers, so this amount of change is not infeasible.

Before taking this estimate at face value however there are a couple of things to take into consideration. First is that Seattle is not a state but a single city, and since these estimates were generated using state level data there is a predictable way in which this may bias these estimates. Because migration or changing ones commute from one city to another is much easier between cities than whole states there is a higher chance that many of the displaced workers will be able to find work in the surrounding metropolitan area. This means that the numbers cited above are likely to be biased upwards, meaning that the actual number of people left out of work is more likely to be closer to the lower limit that my model forecasts, 11,300. This is not all good news for low wage workers however, in practical terms this means that the labor market for the cities surrounding Seattle will also become a lot more competitive as more workers are forced to find jobs outside of the city limits. Another big thing to consider is that the $15 wage rate is not coming all at once, it is being phased in over the course of several years, and this will cushion the blow to the workforce and hopefully avoid a huge shock hitting the labor market. This would also theoretically bias my model’s estimate toward being higher than what will actually occur. With extra time to adjust businesses may find other ways of cutting costs, or may slowly increase prices to compensate. At the very least they would be able to simply curb new hiring over the course of the next few years rather than lay off workers right now. How fast the wages actually rise will depend on how competitive the market for low wage labor actually turns out to be. Intuitively one would think that it would not be as competitive as higher paid positions and that companies will want to drag their feet about raising the wage, and therefore change would come as slow as possible.

With all this in mind here is what I predict will happen; there may be some initial layoffs, but nothing too extreme. However, new hiring will slow down considerably making the market much more competitive. We may also see a slight decrease in the number of new small businesses that emerge within the city due to the increased cost of labor. There will likely be a swelling of prices in and around the city as well. As for the actual increase in the unemployment rate I predict an increase closer to 2.7% than 3.9%, possibly as low as 2% given the biases present in my model. I think that when the dust settles and everyone is being paid at least $15 an hour we will see that there are an extra 10,000 or so people looking for work in the Seattle area than we do now.

In 2014 the unemployment rate in Seattle was 4.1%, which is well below the national average of 5.9%. It will be very interesting to see what happens to the labor market in the next few years in Seattle. A wage increase of this size is as far as I have been able to find unprecedented, so we are treading on new ground, and that is the hardest kind of situation to predict accurately. One thing is sure though, without a major boon in the overall economy firms will be scaling back their workforce to some extent.