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The Extent of Local Minimum Wage Spillovers (Mark Long presents at CSSS Seminar, 2/14/18)

Posted: 2/13/2018 (Local Events)

Mark Long, CSDE Affiliate, Associate Dean for Research and a Professor at Evans School of Public Policy & Governance, Adjunct Professor of Economics 

Cities and states in the U.S. are increasingly implementing large increases in local minimum wages as a means of combating income inequality. Such policies are prompted by sluggish changes in the federal minimum wage, which has not been increased since 2009 and which is not indexed to account for inflation. The City of Seattle passed a local minimum wage ordinance in 2014, which raised the minimum wage for work done in the city from $9.47 to $11 per hour in 2015, to $13 per hour in 2016, and to $15 per hour in 2017. Using rich administrative data, this paper evaluates the extent to which the 2015 and 2016 increases in the minimum wage had effects on local areas surrounding the city. In particular, we evaluate whether it caused a change in average hourly wages and hours worked by low-wage workers in areas outside of the city limits.

Economists have long recognized that labor, economic, and social policies are often implemented at the local level (e.g., city, county, or state), and have used variation of policy regimes across space and time to study the impact of these policies. Spatial and temporal variation in policy regimes provide a natural experiment in which regions that implement a policy are assigned as the treatment group, and regions that did not implement it are used as controls. A common empirical approach compares the temporal difference in outcomes in the treated region to the temporal difference in outcomes in an immediately adjacent region. Advocates for this “boundary-discontinuity” method contend that it would be reasonable to expect the treated region and immediately adjacent region to have parallel trends in outcomes in the absence of the policy innovation. The parallel trends assumption is key to all difference-in-differences estimations. However, the boundary-discontinuity method can fail if spillover effects occur. When a city establishes a minimum wage, it is likely that low-wage workers currently employed outside of the city boundaries will look for jobs inside the city boundaries to take advantage of the higher wages. These workers might displace some workers employed in the city before the minimum wage was implemented. In reaction, employers outside of city boundaries might raise wages to low-wage workers to retain their workforce. Conversely, if displaced city workers or persons unable to find jobs in the city at the higher minimum seek jobs in nearby jurisdictions, the resulting increase in supply may exert downward pressure on wages. As a result, spillover effects may lead to an increase or decrease in wages and, hence, employment in the adjacent region, which in turn would bias difference-in-differences estimates of the policy’s impact.

In our current working paper, we find evidence of a substantial spillover effect of Seattle’s minimum wage on adjacent regions. We estimate that regions within a 40-minute drive to Seattle increased wage rates for low-wage workers by 30% of the increase that we estimate to have occurred in Seattle, though this effect is not precisely estimated. The same regions also experienced employment decreases on the order of 70% of Seattle’s employment decrease. This impact is large and significantly different from zero. Furthermore, we show that ignoring this spillover effect leads to an underestimate of the effect of the minimum wage hike on wage rates and employment within Seattle. When we re-estimate the impact of the minimum wage in Seattle using the popular adjacent county approach, we find a wage effect of about 58% and an employment effect of about 20% of the ones obtained in the specification which allows for spillovers. As a result, the impact on earnings (i.e. a key policy outcome) is misestimated, leading to incorrect conclusions about the welfare implications of a local minimum wage.

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Date: 02/14/2018

Time: 12:30-1:30 PM

Location: Savery Hall, Room 409