The voices of Urban Institute's researchers and staff
August 12, 2014

Higher minimum wages will improve economic well-being in DC

August 12, 2014

The District of Columbia raised its minimum wage as of July 1 and is slated to raise it again each July through 2016 and adjusted for inflation thereafter. What will this mean for employers and employees? Will minimum-wage workers see a real difference in their bank accounts after paying higher taxes and losing public benefits as their earnings rise? And will employment fall, now that workers cost more?

We investigated the effects of a minimum-wage increase in DC and found little evidence to suggest that employment would fall. We also found that the vast majority of low-wage workers would see their earnings and disposable incomes increase. Based on these two findings, we anticipate that the legislated wage increase will improve the well-being of the District’s low-income working families.

Who will be affected by the increase?

We investigated the impact of a higher minimum wage on earnings and income of low-wage workers who both live and work in DC. Many of the findings were similar whether we assumed no impact of increased minimum wages on employment, or small negative impacts on employment.

Of people living or working in DC with wages between $5.50 and $13.50 an hour, only 4 in 10 both live and work in DC. In our study, we assumed that low-wage workers who live and work in DC are affected by a minimum-wage increase even if some are technically exempt from minimum-wage laws. About 41,000 low-wage workers will live and work in DC in 2016 when the minimum-wage increase is fully phased in: these are the workers we focused on in our study.

These low-wage workers are mostly high school graduates. Six in 10 are between the ages of 25 and 54. Nearly 7 in 10 are unmarried with no children living with them, and most work at least 50 weeks a year and are employed in food service, accommodation, or retail.

Will minimum-wage workers keep most of what they earn?

With a minimum-wage increase, low-wage workers’ earnings will rise. But earnings from a job are only one source of a family or individual’s disposable income.

Workers whose earnings increase may lose government subsidies—like tax credits or food, housing, and energy assistance—which cuts into the overall benefit of a wage increase. In the most extreme cases, a family’s disposable income could actually fall as earnings rise.

In our DC study, we found that 50 percent of affected workers will gain $1,500 or more a year in increased earnings, and 31 percent will see an increase in disposable family income of over $1,500 a year.

The biggest gains in earnings are for people in families between the poverty line and twice the poverty line, but the biggest gains in incomes are for affected workers in families with incomes more than twice the poverty line. Affected workers living in near-poor families (those between the poverty line and twice the poverty line) will experience a median rise in earnings of  $1,835 and a median rise in income of $879.  We estimate that the median rise in earnings and income for workers in better-off families will be $1,604 and $1,053, respectively.


Will employment fall?

Basic economic theory predicts that employment will fall as minimum wages rise because labor costs increase and employers will demand fewer workers. But there are many reasons to believe that job losses may be small. For example, most low-wage workers may already be earning close to the new minimum wage. Higher wages may lead to higher worker productivity and reduce labor turnover. Employers may choose to pay for higher wages by reducing worker benefits or by accepting lower profits. Finally, employers may pass the higher labor costs on to consumers in the form of higher prices. In short, the extent to which raising the minimum wage leads to job losses depends on the unique factors that apply at the time and place of the increase. But higher minimum wages can also increase employment if affected workers are in industries where employers exert undue bargaining power.

When we examined how the minimum wage increase in DC would likely affect employment, we  found little evidence that it would fall when minimum wages rose. We base that conclusion on an examination of sub-national minimum wage increases for jurisdictions similar to DC and on past changes in DC’s minimum wage. Most notably, DC experienced a particularly large increase in the minimum wage in the last quarter of 1993 when neither Maryland nor Virginia raised minimum wages. If we were ever likely to see an impact of different minimums across these neighboring jurisdictions, we should have seen changes in the most affected industries at that time, but there is no evidence of a corresponding change in employment. This is demonstrated in the graph below showing restaurant employment in DC and surrounding counties before and after the late-1993 jump in DC’s minimum wage.


View interactive version of this chart.

Of course, at some level of the minimum wage, negative employment effects must materialize, but we don't seem to have raised the minimum wage enough in DC and similar jurisdictions to see those negative impacts.

Lessons from DC apply to other cities and states

In short, there is little evidence in the literature or in recent experience that the kind of increase in minimum wages that DC just implemented will cause any job losses. But even if employment is affected, many workers will be substantially better off with the new minimum wage. The wage increase is not targeted at DC’s poorest residents, in that it tends to benefit higher-income workers more than poor workers, but this need not be seen as a flaw: a higher minimum wage provides greater rewards to those who work more.

Other cities and many states are considering minimum-wage increases, and there is recurring discussion of federal policy changes, so understanding the effects of DC’s increase matter beyond the District.

And now for something a little more technical…

Many other studies have found little to no impact of minimum wage increases on employment. Estimates in prior studies are shown in a plot of their relative importance in a weighted average versus the estimated impact. You can immediately see that the most precise estimates cluster close to zero, but less-precise estimates are often large negative or positive values. You can move the slider along the bottom to limit the graph to more recent years, or click on any point to learn more about that study.  


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