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To date, 42 cities in the United States have instituted minimum wages above the state or federal level. Of these cities, 22 have a minimum wage that is $15 per hour or more—including San Francisco, Seattle, Los Angeles, and Washington, DC—a level that seemed unthinkable just a few years ago.

Advocates for city-wide minimum wages have played an important role both by changing wages in some of the largest and most dense labor markets in the United States and by reshaping the policy terrain more broadly. In these campaigns, advocates for a higher minimum wage first shifted their focus from state and federal government to city councils, mayors, and voters (via ballot initiatives). Subsequently, legislatures in states like California and Washington responded to city-wide minimum wages by passing large state-wide increases of their own. In contrast, other state legislatures passed laws preempting a city-wide minimum wage mandate.

The growing number of cities with minimum wages naturally raises the question: is local variation in minimum wage policies a good idea? Most of the extensive minimum wage literature to date has focused on state- or federal-level changes, but city-level minimum wage changes can have potentially different implications than changes that affect a state or the whole country. For instance, city boundaries are porous, and for many businesses it might be easy to relocate to a few miles outside of the city boundaries. This distortion may also be present to some extent for state-level minimum wages, but it could be much larger for minimum wage changes that are restricted to cities. On the other hand, local variation in minimum wages can better tailor the policy to local circumstances. For example, the level of minimum wage that might raise concerns about unintended consequences in rural areas in California may not bind at all in San Francisco or Los Angeles, given the generally higher wages in those cities.

A recent study in the Journal of Economic Perspectives evaluates these trade-offs. The authors begin with some descriptive evidence on the evolution of city-level minimum wage policies, after which they examine what type of cities have instituted minimum wages and discuss how these characteristics can potentially impact the effectiveness of city-level minimum wage policies. In the next part of the paper, the authors summarize the evolving evidence on city-level minimum wage changes and provide some new evidence of their own.

By combining the existing evidence from cities with some additional insights obtained from the literature on state and federal-level changes, the authors provide an overall (if tentative) evaluation on what city-level minimum wages do. The weight of evidence suggests that city mandates (especially in larger cities) have been successful in raising wages for the bottom quartile of the wage distribution, with limited impact on employment prospects for low-wage workers. But the evidence base is still limited, and for this reason the authors identify some key areas where further research can be particularly helpful.

Read the full article: Arindrajit Dube and Attila Lindner. 2021. City Limits: What Do Local-Area Minimum Wages Do? Journal of Economic Perspectives 31(1), Winter (pp. 27-50).

By Comments off , , February 22, 2021