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Does minimum wage affect inflation?

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  • Aleksandra Majchrowska

Abstract

This study examines the relationship between minimum wage increases and the inflation rate. Data from 16 Polish regional labor markets in 2003-2020 are used to analyze the pass-through effect of the minimum wage on inflation. The New Keynesian model, supported by the Minimum Wage Augmented Phillips Curve approach, and dynamic panel data methods, are utilized. The results show that the minimum wage effect on inflation is statistically significant and positive and is higher when food inflation is the dependent variable. Minimum wage effects vary temporally and across regions. Minimum wage increases are more significant during times of high inflation than in low-inflation periods. As for regional differences, inflationary pressure is greater in regions with strong labor markets and relatively high wages, i.e. regions where companies can pass on more of their increased labor costs to consumers. These findings are important for both the labor market and regional policy, especially given the high inflation rate recently observed in Poland and the minimum wage increases planned over the coming years. They show that even if minimum wage increases do not lead to a reduction in employment, they may generate additional inflationary pressure, especially during economic booms and in regions with low unemployment.

Suggested Citation

  • Aleksandra Majchrowska, 2022. "Does minimum wage affect inflation?," Ekonomista, Polskie Towarzystwo Ekonomiczne, issue 4, pages 417-436.
    • Handle: RePEc:aoq:ekonom:y:2022:i:4:p:417-436
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    References listed on IDEAS

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    6. Lisa J Dettling & Joanne W Hsu, 2021. "Minimum Wages and Consumer Credit: Effects on Access and Borrowing [Price pass-through and the minimum wage]," The Review of Financial Studies, Society for Financial Studies, vol. 34(5), pages 2549-2579.
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    Cited by:

    1. Aleksandra Majchrowska & Paweł Strawiński, 2024. "The evolution of the minimum wage in Poland and its consequences on labour market," Bank i Kredyt, Narodowy Bank Polski, vol. 55(1), pages 55-74.

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    More about this item

    Keywords

    Poland; regional labor markets; minimum wage; inflation; pass-through effect;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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