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.