Does Employment Respond Differently to Minimum Wage Increases in the Presence of Inflation Indexing?

Abstract

The minimum wage literature focuses heavily on “the” employment elasticity of minimum wage increases. In contrast, this paper studies heterogeneity in minimum wage policy. Specifically, we study whether minimum wage increases lead to differential employment effects in states where minimum wages are indexed to inflation. We find evidence they do. To the best of our knowledge, this paper is the first to empirically study inflation indexing. On balance, our results imply that the immediate disemployment effect of an increase in the minimum wage in a state that indexes its minimum wages to inflation is around 3 times the magnitude of the disemployment effect associated with a nominal increase in the minimum wage. Our finding is robust across both “canonical” and “county-pair” models, though it does not hold in our most restrictive specification. Examining the timing of the employment response reveals the disemployment effect associated with a change in the minimum wage is concentrated in the first 14 quarters after a state begins indexing minimum wages to inflation.