Title

Differential effects of economic policy across local labor markets

Date of Award

2009

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Economics

Advisor(s)

Jeffrey D. Kubik

Keywords

Policy, Economic policy, Earned income tax credit, Local labor markets, State and local taxes, Minimum wage, Taxes

Subject Categories

Economics | Labor Economics | Social and Behavioral Sciences

Abstract

This dissertation consists of three essays examining how local labor markets lead to differential impacts of economic policy on behavior. The dissertation explores two primary sources of variation relating to local labor markets: (1) regional variation in economic conditions, and (2) household variation in the costs of moving to a different market. Each essay examines the impacts of a different policy: minimum wages, the Earned Income Tax Credit, and state and local taxes.

Economic conditions, including nominal wages and rents, vary dramatically across local labor markets in the United States. Policies that do not account for this local variation will generate different outcomes across regions of the country, and analysis that ignores it will produce misleading estimates of the impacts of these policies. The first two essays explore how local variation in wages and cost-of-living influences the impacts of minimum wages (Essay I) and the Earned Income Tax Credit (Essay II).

Essay I estimates the differential effects of minimum wages on teenage employment across local labor markets. County level data is used to identify local labor markets with low teenage earnings-where the minimum wage is likely to present a binding constraint on firms. In these counties, the impact of the 1996 increase in the federal minimum wage on teenage employment is found to be larger than had been suggested by some previous studies. When all counties are included-whether or not the minimum wage is binding-small and statistically insignificant effects are found, similar to previous studies using state panels. This essay concludes that the small employment impacts noted in much of the literature are, in part, a result of including local labor markets where the minimum wage is not binding, producing an effect that is the average across binding and non-binding regions. The employment impacts are strongest in small counties, and are isolated to "transitory" jobs and new hires, with no impact found on employment lasting for at least a full quarter or on the employment of young adults ages 19-22.

Essay II-co-authored with Katie Fitzpatrick-expands on what is known about the labor supply response to the Earned Income Tax Credit by exploiting differences in the cost-of-living and nominal wages faced by potentially eligible recipients in different metropolitan areas. We hypothesize that this variation is important because regional cost-of-living affects the purchasing power of the EITC benefit, and eligibility for the EITC is determined by nominal wages. Using the 1993 EITC expansion, we demonstrate that the labor supply response varies considerably with regional cost-of-living. We identify an increase of as much as 10 percentage points in labor force participation by single mothers in the lowest-cost metropolitan areas. There is no discernable participation response in metropolitan areas with the highest housing costs, where approximately 40 percent of the population lives. We find little response along the intensive margin, regardless of living costs in the metropolitan area. We conclude that the welfare-enhancing effects of the EITC are undermined by the interaction of the program's fixed national rules and geographic variation in wages and cost-of-living. In addition, our findings suggest that the federal EITC does little to reduce joblessness in many of the nation's largest cities.

The final essay explores the importance of the costs households face when moving to a different local labor market. These costs include out-of-pocket costs required to physically move, as well as information and opportunity costs, and the "psychic" costs of severing attachments to people and places. These costs, however, are heterogeneous across the population; moving is relatively costly for some groups and less costly for others. Wages and labor supply of groups with lower migration costs will, ceteris paribus, be relatively more responsive to policy changes and localized shocks.

Essay III incorporates these differential migration costs into the empirical literature on the incidence on wages of states and local taxes. The responsiveness of pre-tax wages to changes in state and local taxes (including income, sales and property taxes) is shown to vary by age and education-the key factors driving differential migration costs in Robert Topel's (1986) model of local labor market dynamics. Pre-tax wages of younger, highly-educated workers (those facing the lowest costs of migration) are shown to be quite responsive, while the wages of older, highly-educated workers and young, less-educated workers are generally less responsive. In addition, for households facing low migration costs, cross-state migration rates are shown to be relatively responsive to state and local taxes, but this is not the case for households facing high migration costs.

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