Downward minimum wage rigidity: Evidence from a temporary four-month increase in St. Louis

Abstract

A legislative dispute between the city of St. Louis and the Missouri state government presents a unique opportunity to measure downward wage rigidity in the low-skill labor market. The dispute caused the minimum wage in St. Louis to fall in August 2017 after having risen by 30 percent four months earlier. In this first study of a nominal minimum wage decrease, I evaluate whether firms have a tendency to maintain existing pay levels even when they likely exceed the competitive rate. Analyzing wage trajectories in St. Louis after the minimum wage cut using synthetic controls and a regression analysis, I find that about 3.6 percentage points more workers in the area than we would otherwise expect earn above the statewide minimum wage a year later, and the 5th percentile of wages is about 80 cents higher. Anecdotal evidence is consistent with the interpretation that norms regarding fairness motivated firms to avoid wage cuts. Although I do not observe a decline in hours worked for teenagers or individuals with less than a high school degree, there is some evidence that teenage employment declines. Firms with dynamic expectations regarding a future minimum wage increase may have been particularly willing to maintain higher wages in the near term to avoid paying the costs of taking away a raise they might eventually have to grant anyway.