The voices of Urban Institute's researchers and staff
May 22, 2015

Local may be the way to go with minimum wage policies

May 22, 2015

Los Angeles recently voted to raise its minimum wage from $9 an hour to $15 by 2020, joining a growing group of states and cities that are raising or considering raising their minimum wages. These local initiatives have generated considerable interest among researchers who study low-wage labor markets. Perhaps the most important question raised after the announcement of a minimum wage increase is whether the change will result in job losses.

Individuals who have jobs may enjoy higher wages, but employers may hire fewer workers due to increased costs. Economists have been studying this issue for decades, with differing results. With some exceptions, the strongest methodologies find that the minimum wage has no effect on employment and weaker methodologies find that it reduces employment.

One important caveat is that most of these studies estimate the average effect of the minimum wage across the entire country. That may not be an appropriate guide for local labor markets, which are tremendously diverse. One difference that is critical for the minimum wage is the relative price level. For example, the same good or service tends to be more expensive in Honolulu or New York City than in Danville, Illinois, or Jefferson City, Missouri (the metropolitan areas with the highest and lowest prices, respectively, according to the Bureau of Economic Analysis). Local price level differences can have a dramatic impact on the real value of the minimum wage.

For example, let’s compare the real difference in value between the minimum wage in Los Angeles and in Birmingham, Alabama by adjusting for local price levels. Alabama is one of several states that does not have its own minimum wage set above the federal minimum of $7.25. These states are typically thought of as having weak protections for low-wage workers, but when taking regional price levels into account, the real value of the minimum wage in Birmingham ($8.04) is actually higher than the real value in Los Angeles ($7.61).

With local price level differences playing such an important role in determining the real level of the minimum wage, it should come as no surprise that low price level states like Alabama are reticent to push their minimum wage above the federal level, or that high price level cities like Los Angeles want to bolster their minimum wages. A new minimum wage of $15 in Los Angeles, using current regional price parity data, would be worth $12.69. This is higher than the real value in Birmingham, and perhaps more in line with the views of Los Angeles voters and workers.

A common narrative built around recent local action on minimum wages is that states and cities are forced to act because Washington is gridlocked. An alternative narrative is that the diverse circumstances of local labor markets suggest that state and local minimum wage policies may be more appropriate than the one-size-fits-all approach of a federal minimum. States can and should be advocates for their citizens rather than passive recipients of federal policy decisions.

Only time (and careful empirical work!) will tell how the higher minimum wage works out for Los Angeles. The city’s experience will certainly provide lessons for other states and localities considering their own minimum wage policies.

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