The Employment Impact of City Minimum Wage Increases

Awarded Scholars:
John Schmitt, Center for Economic Policy Research
Heather Boushey, Center for Economic Policy Research
David Rosnick, Center for Economic Policy Research
Ben Zipperer, Center for Economic Policy Research
Project Date:
Jun 2007
Award Amount:
$20,755
Project Programs:
Future of Work

Project Description

 

John Schmitt, Heather Boushey, David Rosnick, and Ben Zipperer at the Center for Economic and Policy Research conducted a study capitalizing on new developments in minimum wage laws at the city level. Schmitt and his colleagues examined the employment effects of minimum wage reforms in three cities that currently have higher minimum wages than the federal rate of $5.15/hr. These cities include San Francisco, Washington D.C., and Santa Fe.

 

For each location, the investigators gathered data on the change in employment before and after the implementation of a city-wide minimum wage. They then looked at the change in employment over the same period in a comparison city. The researchers based their study on microdata from the Quarterly Census of Employment and Wages (QCEW) which provides detailed information on employment, quarterly earnings, geographic location, and industry.

 

Data analysis, by John Schmitt

 

For two decades, economists have hotly debated the employment impacts of the minimum wage. Traditionally, the reigning consensus held that raising the minimum wage reduced the employment of teenagers, a group that was more likely than older workers to be earning at or near the minimum wage. In the 1990s, however, a burst of new research, generally using microdata at the state level, raised serious doubts about this view. These studies suggested modest increases in the minimum wage were consistently associated with higher wages at the bottom of the labor market, but seemed to have little or no discernible impact on employment.

 

Our new study, funded by the Russell Sage Foundation, takes the level of analysis down to the city level, conducting the first comprehensive analysis of three city-wide minimum-wage laws—in San Francisco (2004), Santa Fe (2004), and Washington, DC (2003). These cities decided prevailing federal and state laws set a wage floor that was too low and enacted higher city-wide minimum wages, the first three in the nation to do so. We analyzed confidential government microdata that covers virtually every employer and every worker in the three cities, surrounding suburbs, and a nearby “control” city. To gauge the economic impact, we compared the wage and employment outcomes in the minimum-wage cities with what happened in the suburbs and the nearby cities (Oakland, Albuquerque, and Baltimore).

 

Our results show a minimal impact on employment. In San Francisco and Santa Fe, the large increases in the prevailing minimum wage raised wages paid in typically low-wage establishments, including fast food, retail, and small businesses. At the same time, we found no consistent impact on employment in these same sectors. The large majority of employment changes we observed were small and not statistically distinguishable from zero. Of the statistically significant changes we did see, slightly more were positive—suggesting job gains after the minimum wage—than negative.

 

In Washington, DC, the minimum wage appears to have had little “bite”—potentially affecting only a small share of workers. As a result, we find that the minimum wage there had no measurable impact on either wages or employment.

 

Our findings for San Francisco and Santa Fe do not overturn the laws of supply and demand. Instead, they underscore that the low-wage labor market is more complicated than generally assumed by the standard economic models. Higher wages do raise direct labor costs, and all else constant, we would expect this to reduce employment. But, higher wages also make it easier for firms to fill vacancies, motivate workers, and retain employees. The consistent finding of little or no employment effects of minimum-wage increases suggest these countervailing indirect cost savings offset an important portion of the direct costs.

 

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