The Local Aggregate Effects of Minimum Wage Increases
As part of the Fair Labor Standards Act, the federal government introduced a national minimum wage in 1938. Since then, it has raised the wage 22 times; the latest increase, in 2009, lifted it to $7.25 per hour. State-level minimum wage increases have occurred with much greater frequency, especially recently. In 2009 alone, 22 states raised their minimum wage, following 20 state-level increases in 2018. In total, there were 304 changes in the minimum wage at the federal and state levels from 1999 through 2017, 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 each passed legislation to gradually raise its minimum wage to this level; Seattle, in 2014, enacted a similar gradual increase to $15 per hour. Other states have implement more modest multi-year raises.
A voluminous empirical literature largely finds that within the range of the increases historically experienced in the United States, higher minimum wages have minimal employment effects. However, this literature largely overlooks the fact that through local 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 and city- or county-level minimum wage changes for the 1999–2017 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).
Key Findings
- A 10 percent increase in the minimum wage in a city or Metropolitan Statistical Area (MSA) is associated with an overall (all-items) inflation rate that is cumulatively 25 basis points higher relative to cities 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 prices of food consumed away from home: With a 10 percent rise in the minimum wage, food away from home prices rise about 0.4 percentage point during the year of the minimum wage hike and an additional 0.1 percentage point the following year.
- Inflation rises somewhat more in response to a minimum wage hike in cities where the share of low-wage workers is greater. Following a 10 percent increase in the minimum wage, all-items inflation is cumulatively 0.08 percentage point higher than average in locations with a one-standard-deviation-higher 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 point initially for a 10 percent increase in the minimum wage. Real consumption of food at home also goes up, but by a somewhat smaller amount.
- There is some evidence that 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 with households engaging in intertemporal substitution in anticipation of real income gains.
- Increases in the minimum wage lower total debt among individuals with low credit scores, raise auto debt, and appear to increase consumers’ access to credit.
Implications
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.
Abstract
Using variation in minimum wages across cities and controlling for differences in business-cycle factors and long-run local economic trends, we find that following minimum wage increases, both prices and nominal spending rise modestly. These gains are larger for certain sub-categories of goods, such as food away from home, and in locations where low-wage workers account for a larger share of employment. Further, minimum wage increases are associated with reduced total debt among households with low credit scores, higher auto debt, and increased access to credit.