The Effect of State Minimum Wage Laws on Government Budgets

• In Event: Equity, Access, and the Distributive Effects of Public Policy

Abstract

Minimum wage policy is among the most actively debated labor market interventions in the United States, yet its fiscal consequences for public sector budgets remain poorly understood. While an extensive literature has examined employment effects in the private sector, state and local governments are themselves among the largest employers of low-wage workers, and any policy-induced changes in labor costs, tax revenues, or demand for public services may carry substantial implications for budget sustainability and service delivery. This paper asks whether and how state-level minimum wage increases affect government budgets, with a focus on three distinct fiscal channels: the cost of public service provision, own-source tax revenues, and social welfare expenditures. We further examine whether the magnitude of wage increases produces heterogeneous fiscal effects and whether those effects differ systematically between state and local governments. Drawing on a median voter framework, we demonstrate that the theoretical prediction for the net fiscal effect of minimum wage increases is inherently ambiguous, as the budgetary response depends on the price elasticity of demand for public services and the relative strength of cost, revenue, and voter preference channels. Empirically, we classify states into policy groups following the pre-analysis framework of Clemens and Strain (2021), distinguishing large ($1 or more) statutory increases, and employ a two-way fixed effects estimator using individual-level data from the Current Population Survey and fiscal data from the Census of Governments Finance. Our results indicate that minimum wage increases do not generate statistically significant effects on public employment levels or workforce turnover. However, large minimum wage increases are associated with significant increases in social welfare expenditures, while effects on own-source tax revenues and government wage and salary expenditures are smaller in magnitude and less precisely estimated. Importantly, local governments exhibit larger and more consistently significant fiscal responses than state governments, a pattern consistent with the higher concentration of minimum wage workers in local public employment. These findings suggest that public sector workforce size is not a primary margin of adjustment following minimum wage increases; rather, the dominant budgetary impact operates through social welfare expenditures, particularly at the local level. Policymakers should anticipate asymmetric fiscal pressure across government tiers and design intergovernmental fiscal arrangements accordingly. This research contributes a rigorous empirical foundation to an underdeveloped area of public finance and offers a replicable framework for evaluating the fiscal consequences of future minimum wage legislation.

Author

• Sieun Lee, Indiana University
  Presenting Author