Working Papers

The Impact of Living Wage Laws on Urban Economic Development Patterns and the Local Business Climate

Evidence from California Cities

Traditional local economic development policies entice private businesses to create highpaying jobs in a given jurisdiction through direct subsidies or by projecting a positive “business climate” within regional and global arenas. Since 1994 however, “living wage” ordinances have emerged as an alternative response to labor market polarization in urban areas. However, these laws raise labor costs for employers and thus have the potential to reduce economic growth.

I assess the impact of living wage laws on employment and establishment levels in the cities that pass them. I provide separate estimates for government contractors and other firms that may be indirectly signaled by a change in the local political environment. I use the National Establishment Time-series database to construct a panel dataset that tracks employment and establishment levels for all California jurisdictions. I produce difference-in-difference estimates that indicate that living wage laws have no significant impact on employment or establishment growth. Additionally, I find no evidence that the passage of living wage laws sends a negative “signal” to businesses about a potentially harmful local business climate.