The Local Aggregate Effects of Minimum Wage Increases

• Published date: 01 February 2020
• Author: DANIEL COOPER,MARÍA JOSÉ LUENGO‐PRADO,JONATHAN A. PARKER
• Date: 01 February 2020
• DOI: http://doi.org/10.1111/jmcb.12684

DOI: 10.1111/jmcb.12684

DANIEL COOPER

MAR´

IA JOS ´

E LUENGO-PRADO

JONATHAN A. PARKER

The Local Aggregate Effects of Minimum Wage

Increases

Using variation in minimum wages across cities and controlling for differ-

ences 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 subcategories of goods such

as food away from home and in locations where low-wage workersaccount

for a larger share of employment. Further, minimum wage increases are as-

sociated with reduced total debt among households with low credit scores,

higher auto debt, and increased access to credit.

JEL codes: D14, E20, E31, J20, J38

Keywords: minimum wages, inflation, consumption, household debt.

THE MINIMUM WAGE IS ONE of the most popular, contentious,

and frequently adjusted economic policies in the United States. Since its intro-

duction at the federal level in 1938, the national minimum wage has been raised

22 times. State-level minimum wage changes have occurred more frequently—

especially recently—with 22 states increasing their minimum wages in 2019 alone

(following 20 state-level increases in 2018). In addition, a number of cities have

raised the minimum wage within their geographic boundaries in recent years. While

a binding minimum wage raises the incentive for low-wage workers to work, it also

reduces the incentive for employers to hire them. As a result, a binding minimum

Special thanks to Giovanni Olivei and participants at the 2019 Federal Reserve System Credit Bureau

Data Users Conference for helpful suggestions and to David Brown, Chloe Lee, and Sarah Morse for

excellent research assistance. The views in this paper are our own and do not necessarily reflect the views

of the Federal Reserve Bank of Boston or the Federal Reserve System.

DANIEL COOPER is in the Research Department, Federal Reserve Bank of Boston, Boston (E-mail:

Daniel.Cooper@bos.frb.org). MAR´

IA JOS´

ELUENGO-PRADO is with the Federal Reserve Bank of Boston

(E-mail: maria.luengo-prado@bos.frb.org). JONATHANA. PARKER is with Massachusetts Institute of Tech-

nology (E-mail: japarker@mit.edu).

Received July 30, 2018; and accepted in revised form June 7, 2019.

Journal of Money, Credit and Banking, Vol. 52, No. 1 (February 2020)

C

2019 The Ohio State University

6:MONEY,CREDIT AND BANKING

wage lowers employment in a competitive labor market, although it can raise em-

ployment in a monopsonistic labor market. A voluminous literature measures the

microeconomic effects of the minimum wage on the outcomes of low-wage work-

ers by, for example, comparing similar workers in the same labor market who are

subject to different minimum wages (see Card and Krueger 1994), or by comparing

employment rates of different types of workers shortly after changes in minimum

wages, controlling for city-level economic conditions. But an important outcome of

minimum wage changes may be their influence on local economic conditions.

In this paper, we study local economies—defined as metropolitan statistical areas

(MSAs or cities) that correspond to broad labor markets—and show how price levels,

consumer spending, household debt, and credit access adjust over time following

minimum wage hikes.

We first show that overall inflation increases modestly in the year of a minimum

wage increase, and again by a similar amount in the subsequent year. This slowlocal-

aggregate price adjustment comes from rapid adjustment in prices for food away

from home, which is typically produced using a larger share of low-wage workers,

and slower and smaller adjustment in the prices for goods produced using fewer local

low-wage workers.

Second, we find increases in nominal consumption expenditures that are more

broad based following a rise in the minimum wage, with the largest effect for food

spending. Our estimates imply that real spending on food rises when the minimum

wage increases, which implies that the income effects from minimum wage gains for

low-wage workers and any local general equilibrium effects that raise local demand

outpace the substitution effects from the higher prices.

Finally, consistent with a relaxation of payment-to-income constraints on borrow-

ing when the minimum wage increases, credit appears to become easier to obtain,

as measured by the number of open accounts relative to credit inquiries. Also, while

there is little change in debt for the average individual, debt levels for subprime

individuals decrease when the minimum wage rises, suggesting that the effects of

debt repayment dominate those of new borrowing for bigger-ticket items for this

group. We further showthat auto loans increase in response to an increase in the min-

imum wage, with larger effects among likely constrained borrowers (subprime and

young).

We reach these conclusions by using the variationin minimum wages across states

and cities (where applicable) and over time. Wemeasure the responses of growth rates

in local economic outcomes the year during and 1 year after a change in the minimum

wage. Many previous studies focus on the more immediate minimum wage effects

over a few months, which measure well the direct impact of the increase in the cost of

low-wage labor but omit medium-term responses to the prices of intermediate inputs

(from other firms) as the local economy converges to a newequilibrium. On the other

hand, we do not focus purely on the long-run relationship between minimum wages

and local outcomes, because the long-run propensity of a state (city) to have a high

minimum wage seems likely to be related to other policies or the standard of living in

that state (city). For instance, a state (city) with a high long-run growth rate may raise