Distributional Effects of Local Minimum Wage Hikes: A Spatial Job Search Approach∗ Click here for the latest version

This paper develops and estimates a spatial general equilibrium job search model to study the effects of local and federal minimum wage policies. In the model, firms post vacancies in multiple locations. Workers, who are heterogeneous in terms of location and educational types, engage in random search and can migrate or commute in response to job offers. I estimate the model by combining multiple databases including the American Community Survey (ACS) and Quarterly Workforce Indicators (QWI). The estimated model is used to analyze how minimum wage policies affect employment, wages, job postings, vacancies, migration/commuting, and welfare. Empirical results show that local minimum wage increases lead to an exit of low type (education<12 years) workers and an influx of high type workers (education≥12 years), which generates negative externalities for workers in neighboring counties. I use the model to simulate the effects of a range of minimum wages. Minimum wage increases up to $14/hour increase the welfare of high type workers but lower welfare of low type workers, expanding inequality. Minimum wage increases in excess of $14/hour lower the welfare of all workers, because the wage increases do not compensate for the disemployment effects. Model simulations also show that low type workers prefer federal minimum wage policy over local minimum wage policy when the minimum wage increases are moderate.