The Local Aggregate Effects of Minimum Wage Increases
As part of the Fair Labor Standards Act, the federal government initiated a national minimum wage in 1938, which has since been raised 22 times, the latest increase in 2009 going to $7.25 per hour. State-level minimum wage increases have occurred with much greater frequency, especially quite recently, with 17 states raising minimum wages in 2016 and 19 states doing so in 2017. In total, there have been 247 changes in the minimum wage on the federal and state level between 1999 and 2014, resulting in substantial variation in current minimum wages across the United States. The policy intent behind minimum wage laws is to raise the return to employment for low-wage workers; indeed, the idea of a $15 per hour "living wage" has been growing—in 2016 California and New York passed legislation to gradually raise their minimum wages to this level (Seattle enacted a similar gradual $15 per hour increase in 2014), while other states are enacting more modest multi-year raises.
A voluminous empirical literature has largely found that within the range of the increases historically experienced in the United States, higher minimum wages have minimal employment effects. However, this literature has largely overlooked the fact that through general equilibrium adjustments that go beyond the labor market, the level of the minimum wage should affect prices and consumer spending. Moreover, higher minimum wages may cause fluctuations as local economic conditions adjust to the changed regulations. This paper addresses these less-studied issues by exploiting the variation in minimum wages across the United States and the fact that labor markets are defined by commuting distances. The authors compile a dataset of state-level minimum wage changes for the 1999–2014 period and use city-level price data from metropolitan statistical areas to measure the dynamic effects that minimum wage increases have on annual changes in city-level prices (inflation) and consumer spending.
- A 10 percent increase in the minimum wage in a Metropolitan Statistical Area (MSA) is associated with an overall (all-items) inflation rate that is 8 basis points higher relative to MSAs that do not change their minimum wage. Yet this rise in inflation is not evenly distributed across all goods and services. Minimum wage increases have the largest and fastest measured impact on food prices, especially on food consumed away from home: a 10 percent rise in the minimum wage leads about a 0.3 percentage point rise in prices on food away from home for the first year after the wage increase, and an additional 0.1 percentage point the second year after the increase. The rise in inflation is slower to feed through to prices on other goods and services, primarily due to a slow price response in the service sector. By the end of the second year, the total city-level rise in inflation amounts to a 0.3 percentage point increase for a 10 percent rise in the minimum wage.
- In locales where the share of low-wage workers is greater, price increases and price adjustments are larger, more rapid, and more significant across expenditure categories. Across cities, for a 10 percent rise in the minimum wage, food away inflation rises 1.1 percentage points in locales that have a one-standard deviation higher share of low-wage workers, as compared to these same prices rising 0.6 percentage points in areas with an average share of low-wage workers.
- Consumers increase the quantity of food that they consume away from home in response to a rise in the minimum wage. Real spending on food away from home goes up about 0.5 percentage points for a 10 percent increase in the minimum wage. Real consumption of food at home also goes up.
- Spending on durable goods increases in advance of the minimum wage change going into effect. This result is consistent with minimum wage increases leading to more credit being available to low-income workers, and households engaging in intertemporal substitution in anticipation of real income gains.
- Increases in minimum wages also lower debt among households with low credit scores, raise auto debt, and appear to increase access to credit.
Minimum wage increases result in small but significant increases in prices and consumption, particularly in economic sectors where firms tend to employ a large number of minimum-wage and low-wage workers, such as restaurants. This finding suggests that firms may offset their higher labor costs by raising prices. These price increases have thus far been fairly modest. However, the average historical percentage change in the minimum wage across states is not large. Should minimum wages start to increase more rapidly, the price effects could be larger and the inflation effects may warrant additional attention from monetary policymakers.
This paper examines the effect of minimum wage changes on local aggregate economic outcomes besides employment and wages. Using variation in state-level minimum wages across locations, we find that minimum wage increases have a relatively modest effect on both city-level inflation and spending growth over the years following the change. The effects are larger in industries and locations that employ a large share of low-wage and minimum-wage workers. Increases in minimum wages also lower debt among households with low credit scores, raise auto debt, and appear to increase access to credit.