Authors
Abstract
We present new evidence on the labor market effects of large and permanent minimum wage increases by examining the policy changes implemented by Minneapolis and announced by Saint Paul in 2018. Beginning with synthetic difference-in-differences methods, we find that the increase in the minimum wage substantially decreased employment in restaurants, retail, and health, even after accounting for potential confounding effects from the pandemic and civil unrest. Next, using variation in exposure to the minimum wage across establishments and workers within zip codes and industries of the Twin Cities, we find employment effects that are about half as large as those from the time series. We quantify an industry equilibrium model to rationalize our estimates and differentiate among competing economic mechanisms that determine how the minimum wage affects the labor market. Our model accounts quantitatively for the importance of reduced entry in generating a larger employment decline than implied by the cross-sectional estimates; for the employment decline from the announcement of a future minimum wage increase; and for the more negative employment effects of the minimum wage over time, relative to the size of the increase, and when the economy is in a recession.