Monday, March 24, 2014

What Happens When Liberal Cities Raise Their Minimum Wage?

The NY Times has published an interesting piece making the case that more cities should raise their minimum wage.  The authors argue that firms can benefit from complying with such wage hikes as their workers will be more loyal and will quit less.  The more interesting question to me here concerns the economic incidence of such local wage growth.

As liberal cities such as Seattle raise their minimum wage, how do local businesses respond?  How many shut down? How many remain in business and raise the price to final consumers?  In liberal cities, the typical consumer is also likely to be liberal.  Are such consumers willing to pay their "fair share" for higher coffee prices and locally produced services?  In this case, the "buy local" movement shifts the redistribution from the firms who employ the minimum wage workers to their consumers.

A future urban economics project should construct a CPI index in liberal versus conservative areas to see whether residents of cities such as Seattle and San Francisco pay significantly more for a basket of common goods than the people of Houston.  Some of this is due to differential rents for land, and some is due to differential housing regulation (further driving up the price of real estate) but if this localized minimum wage movement is phased in across liberal cities then "over paying" low skill labor in liberal places will be another reason why a $ of nominal earnings for a middle class household doesn't go far in liberal places.

Another project for an urban/local public finance scholar would be to build on David Albouy's work on ranking city quality of life.  He ranks metropolitan areas with respect to their quality of life and their productivity.  Are liberal areas more highly ranked in terms of quality of life? If the answer is "yes", then in a simple differentiated products model, liberal cities can engage in more redistributionary policies (i.e raise the tax on the middle class) without driving them away because they have market power.   How much market power do they really have?   A second question that interests me very much here relates to selection versus treatment.  Do liberals make a city great through the public goods policies they enact and their cool lifestyle?  This would be a treatment effect.  Or, have liberals moved to the areas with exogenous great life and simply settled there and then introduced their funky redistributionary policies?

This intersection between politics and urban economics is a ripe subject.   I have published a few papers on this including;  this one on housing supply and this local redistribution paper with Ed Glaeser.