Last month, we released a study looking at how raising the minimum wage in Oklahoma would impact housing security in the state. Overall, we found that a minimum wage of $15 per hour would decrease housing cost burden across the state.
Depending on who you are talking to, this result is either completely obvious or seemingly impossible. That’s because when minimum wages go up, there are two counterbalancing effects. Higher wages means bigger paychecks, but higher wages means higher costs for employers and jobs being cut as a result.
Much of the impact of higher minimum wages centers on this tradeoff. It’s easy to determine how much wages are going to increase, but understanding how many jobs are lost when minimum wages go up is more difficult.
A new working paper published last month tries to help answer this question. These researchers explore some of the city-level dynamics that influence how changes to the minimum wage impact the local labor market.
One of the most important factors they identify is the size of the city. It is well documented that workers in large cities earn more than their counterparts with the same education and experience elsewhere.
As a result of this, minimum wages are less likely to be binding in large cities. If workers are already making $20 per hour, then raising the minimum wage to $15 does not affect them at all. In big cities, this is more common.
The paper also looks at how specific labor market conditions in each city factor into this equation. Specifically, they explore how many employers there are and how easily workers can move between jobs.
The situation where there is a single employer is called monopsony. This is the opposite of monopoly, where there is only one supplier. Under a monopsony, there is only one purchaser (in this case an employer purchasing labor), and because they are the sole buyer they have much more influence over prices in the market.
In a lot of cases, the number of employers is tied to how easily people can move between jobs, but not always. Monopsony conditions are much better described by how difficult it is for people to move between jobs rather than just the pure number of employers in a region. Things like non-compete agreements can lead to monopsonistic conditions even in markets with many employers.
If a labor market is very monopsonistic, employers could have the power to keep wages below what they would be under more competitive conditions. If this is happening, then raising the minimum wage could actually lead to increased employment. This is because potential employees would have the option to earn wages closer to their fair market value and would choose to enter the labor market as a result.
Understanding the effects of raising the minimum wage requires understanding how city size and labor market dynamics influence outcomes. Large cities may see less and cities with more monopsonistic labor markets are likely to have better employment, while smaller and more rural areas that still have competitive labor markets are more likely to have worse outcomes.
This paper highlights the importance of local policy analysis. In lots of cases, we as analysts use state level averages in order to measure outcomes. While this is not inherently bad, and is often required given data limitations, it is important to recognize that we can miss some important details along the way. More policy analysis that specifically focuses on these narrow contexts could be extremely important for improving outcomes in cities across the country.