About a month ago I talked about a study I conducted to estimate the effect that Seattle’s new minimum wage laws will have on the local unemployment rate, and today I take that analysis one step further and use what I gleaned from that study to estimate a couple of figures that might be more useful in interpreting the impact of the new policy. The first figure I estimate today is the amount of income redistribution that will take place once the new policy has been fully phased in; income redistribution from business owners to low wage workers being the intended effect of the new policy. I then estimate the unintended effect of the policy, the size of the deadweight welfare loss to society created by the policy through the resulting loss of jobs. In order to estimate these two amounts I combine my estimates regarding decrease in employment with demographic data provided by the University of Washington study “Who Would be Affected by an Increase in Seattle’s Minimum Wage?” that I referenced in my previous post. The UW study does attempt to estimate how much income will be redistributed to low wage workers, but explicitly assumes that there is no change in employment within the city due to the new policy, an assumption it strongly cautions will not hold in the real world.

The UW study breaks workers affected by the wage increase into three categories; workers who were making minimum wage at $9.32 per hour before the increases, workers making between $9.32 and $12.12, and workers making between $12.13 and $15. I use these three categories in order to estimate the income redistribution caused by the wage increases as the report provides detailed demographics regarding these three categories of wage earners. With estimates on the number of workers and average hours worked per year for these groupings I am easily able to get an estimate of how much income would be redistributed to these workers once the $15 minimum has been fully integrated.

A worker who earned the previous minimum will receive an average increase of $7,100 per year, the average worker who earned between the minimum and $12.12 will likely receive on average of around $6,750 annually and a worker who earned between $12.13 and $15 will potentially take home an additional $2,350 per year on average. When I aggregate these numbers for all of the workers in these categories I find that the total amount of redistribution will be around $492.7 million. This number assumes that the number of people employed within Seattle by that point has shrunk by the previously predicted amount of about 10,000 people, and further assumes that all of these workers were making the previous minimum wage before the increase. I am assuming that since the lowest paid workers contribute the least value added to an organization that they will be the first ones to be laid off due to the cost of compensation. In reality this may not always be the case; businesses with very small profit margins may be forced to either shut down or relocate, and in those cases all of the workers employed therein would be out of jobs regardless of how much they were being paid. This may have an effect on this estimate, but it is not something that I have found sufficient information about to speak to at this time.

The other number that will be relevant to the evaluation of the wage policy in the future is the size of the deadweight loss associated with the enactment of the wage policy. A deadweight loss is essentially the amount of money that is no longer being made, or business that is no longer conducted therefore shrinking the economy as a result of the policy change. It is a fairly simple matter to estimate the size of this loss associated with the number of workers laid off. Assuming again that there will be roughly 10,000 people out of work, and that they were making minimum wage before they were laid off, I estimate this loss being around $116.6 million. Again since I don’t have reliable estimates about how many businesses may close shop due to the increased cost of labor, this is not the total cost of the deadweight loss to society, and that total will be somewhat higher.

Redistribution to the three discussed low income groupings alongside total redistribution and deadweight loss

One practical interpretation of these estimates is that for every $4.23 that is redistributed to low income workers $1 is lost. Or for every $1 of redistribution that will take place $0.24 will be lost. Hopefully in practice the redistribution to loss ratio will be higher, meaning a lower redistribution cost, but this is something we won’t be able to tell until the changes have had a chance to shake themselves out, and this will take several years to happen due to the gradual phasing in of the wage changes. For now though all we can do is try to predict what will happen and plan for that future accordingly.