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State Economy Will Absorb Higher Minimum Wage

PULLMAN, Wash. — Washington state’s highest in-the-nation minimum wage slated to go up to $7.94 on Jan. 1 will have a modest, mixed but mostly positive, impact on the economy, according to an assessment conducted at Washington State University.

The loss of gross state product from the 5 percent minimum wage increase would be roughly $12 million or just 0.006 percent of the baseline gross state product, according to David Holland, professor of economics.

Holland used a computer simulation model to look at the economic impact of minimum wage increases. The economic model calculates baseline equilibrium of supply and demand. The economic model starts by simulating this equilibrium in 2002.

An assumed minimum wage change is introduced, and the model simulates how the economy behaves as it adjusts to that change until it reaches a new equilibrium. The new equilibrium is compared with the baseline economy, and the changes are calculated.

“The advantage of the computer model that we used is that it is possible to look at the economic impact of just the minimum wage increase and observe how the economy reacts to only that shock,” Holland said.

“These finding are consistent with the view that minimum wage increases are absorbed by the Washington economy with very little overall damage, and that on balance, such increases are beneficial to minimum wage workers in the sense that the minimum wage bill is increased in both the short-run and long- run with little job loss,” he said.

“For the economy as a whole, a 5 percent increase in the minimum wage leads to a loss of roughly 2.5 percent of all minimum wage jobs, but the wage bill goes up, so the remaining 97.5 percent of all minimum wage workers are better off.”

The main industries losing minimum wage jobs will be agriculture, food service and bars, according to Holland. “You need to remember,” he said, “that minimum wage jobs in Washington make up only 2.4 percent of the total state jobs, about 85,000 jobs out of a total of 3.6 million full- and part-time jobs in 2002.

“It is true that farmers face a very elastic demand for their product and cannot pass on wage increases in the form of higher agricultural commodity prices,” Holland said. “Farmers will adjust to the minimum wage increase by cutting back on more expensive minimum labor and by substituting cost- effective technology if it is available.”

The state’s minimum wage is recalculated each September by the Washington State Department of Labor and Industries. The adjustment, required by an initiative passed by voters in 1998 is based on changes in the federal Consumer Price Index for Urban Wage Earners.

Holland’s study was funded by the Washington Potato Commission.

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