The Unassuming Economist

Who pays when minimum wage hikes come through the drawn-out demand-supply legislative processes?

This is precisely the question taken up by researchers Christopher Esposito of the University of Chicago and Edward Leamer and Jerry Nickelsburg of UCLA in an interesting working paper series. Drawing on a unique set of mandated wage hikes in the Los Angeles area, they present evidence that minimum wage changes led area restaurants to raise prices, change menu items, obtain lower rents in the high wage areas and, in some cases, caused eateries to shut down.

Results from the paper suggest that policymakers face an important dilemma when designing minimum wage policies to redistribute income while minimizing job loss. So, on one hand, restaurants in high-income neighborhoods studied by the authors passed on the full incidence of the minimum wage differential to their customers suggesting that minimum wages should be set relative to local income levels. The price passthrough channel for income redistribution is optimized when minimum wages are set uniquely for fine-grained spatial units, such as neighborhoods, within which the elasticity of demand for restaurant meals is homogenous. However, on the other hand, their findings also indicate that customers’ demand for restaurant meals can spill across jurisdictional borders with different minimum wages. Therefore, different minimum wages across fine-grained spatial units have the potential to move customer demand, jobs, and tax revenue out of jurisdictions that enact higher minimum wages. A universal minimum wage increase is not sensitive to this heterogeneity in the elasticity of demand, while minimum wage increases enacted at the neighborhood scale may cause restaurants to relocate out of higher-wage areas. The optimal spatial scale for setting minimum wages must balance these two offsetting forces.

In addition to these policy considerations, the study also raises the possibility that some of the incidence of minimum wage increases falls on landlords. The theoretical model predicts that land rents in regions subject to larger minimum wages will decrease, particularly at locations close to areas with lower minimum wages. This proposition is further strengthened because restaurant properties have specific use characteristics which are costly to change.

Click here to read the full explainer article/ full paper.

Source: Esposito et al. (2021). NBER. Who Paid Los Angeles’ Minimum Wage? A Side-by-Side Minimum Wage Experiment in Los Angeles County.