Assessing the Economic Impact of Minimum Wage Increases on the Washington Economy: A General Equilibrium Approach

Abstract

Washington voters passed Initiative Measure No. 688 on November 3, 1998. This bill increased Washington’s minimum wage to $5.70 on January 1, 1999.and to$6.50 on January 1, 2000. The Initiative required that future annual changes in Washington’s minimum wage be indexed to inflation in the BLS Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). As of 2005, Washington had the highest minimum wage in the nation at $7.35 per hour. Eleven other states have minimum wages above the Federal minimum wage of$5.15 per hour; however, Oregon is the only other state with an inflation-indexed minimum wage, which was $7.05 per hour in 2004. A computable general equilibrium (CGE) model of the Washington economy was used to examine the economic impact of increases in Washington’s minimum wage. Results from the short-run model indicated that a five percent increase in Washington’s minimum wage would cause a loss of 1909 minimum wage jobs (2.5 percent of baseline minimum wage jobs) but the wage bill for minimum wage workers would increase by$22.61 million (2.38 percent of the baseline minimum wage bill). The loss in the total wage and capital bill for the state economy was $14.04 million. The predicted change in gross state product was roughly 0.007 percent. Tracing the impact of increases in the minimum wage across the size distribution of household income, low income households in Washington experienced an increase in welfare and there was a slight decrease in welfare for high income households.Washington's minimum wage, the Washington CGE model, Two-level CES production functions, elasticity of labor-capital substitution, welfare change