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Price pass-through and minimum wages

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  • Daniel Aaronson

Abstract

A textbook consequence of competitive markets is that an industry-wide increase in the price of inputs will be passed on to consumers through an increase in prices. This fundamental implication has been explored by researchers interested in who bears the burden of taxation and exchange rate fluctuations. However, little attention has focused on the price implications of minimum wage hikes. From a policy perspective, this is an oversight. Welfare analysis of minimum wage laws should not ignore consumers. Furthermore, estimates of price shifting can have important implications for wage-push inflation stories, as well as potentially provide an explanation for the small short-run employment effects that have been found in some of the minimum wage literature. Finally, for purposes of monetary policy, it is critical to isolate one-time price increases from longer term trends. ; This paper uses three data sources on restaurant prices to examine the impact of minimum wage hikes in Canada and the U.S. Particular attention is paid to the timing of these price changes and their overall impact relative to full or competitive price pass-through predictions. The results suggest that restaurant prices rise roughly one-for-one with increases in the wage bill that result from minimum wage legislation. Furthermore, the price responses are concentrated in the quarter surrounding the month that the legislation is enacted. Although minimum wage legislation is typically enacted many months in advance, there is no price response leading up to the hike and little adjustment in the months subsequent to the hike, excepting the few months around the enactment date. If anything, there is some evidence that minimum wage price effects dissipate over time. The magnitude of these findings is roughly the same in the U.S. and Canada, and is fairly robust to changes in data, specification, and estimation techniques. However, because of small predicted elasticities, it is difficult to draw inferences about the price impact on broader indices or industries that have a small share of low wage labor.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series, Macroeconomic Issues with number WP-97-03.

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Date of creation: 1997
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Handle: RePEc:fip:fedhma:wp-97-03

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Related research

Keywords: Wages ; Labor market;

References

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  1. Timothy J. Besley & Harvey S. Rosen, 1998. "Sales Taxes and Prices: An Empirical Analysis," NBER Working Papers 6667, National Bureau of Economic Research, Inc.
  2. Jaewoo Lee, 1997. "The Response Of Exchange Rate Pass-Through To Market Concentration In A Small Economy: The Evidence From Korea," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 142-145, February.
  3. Jean Baldwin Grossman, 1983. "The Impact of the Minimum Wage on Other Wages," Journal of Human Resources, University of Wisconsin Press, vol. 18(3), pages 359-378.
  4. Michael L. Katz & Harvey S. Rosen, 1985. "Tax Analysis in an Oligopoly Model," NBER Working Papers 1088, National Bureau of Economic Research, Inc.
  5. Lawrence F. Katz & Alan B. Krueger, 1992. "The Effect of the Minimum Wage on the Fast Food Industry," NBER Working Papers 3997, National Bureau of Economic Research, Inc.
  6. David Neumark & William Wascher, 1992. "Employment effects of minimum and subminimum wages: Panel data on state minimum wage laws," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 55-81, October.
  7. Besley, Timothy, 1989. "Commodity taxation and imperfect competition : A note on the effects of entry," Journal of Public Economics, Elsevier, vol. 40(3), pages 359-367, December.
  8. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
  9. Karp, Larry & Perloff, Jeffrey M, 1987. "Estimating market structure and tax incidence: the Japanese television market," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt8769c17g, Department of Agricultural & Resource Economics, UC Berkeley.
  10. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
  11. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Papers 5654, National Bureau of Economic Research, Inc.
  12. Stern, Nicholas, 1987. "The effects of taxation, price control and government contracts in oligopoly and monopolistic competition," Journal of Public Economics, Elsevier, vol. 32(2), pages 133-158, March.
  13. Sumner, Daniel A, 1981. "Measurement of Monopoly Behavior: An Application to the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 1010-19, October.
  14. Poterba, James M., 1996. "Retail Price Reactions to Changes in State and Local Sales Taxes," National Tax Journal, National Tax Association, vol. 49(2), pages 165-76, June Cita.
  15. Baker, Michael & Benjamin, Dwayne & Stanger, Shuchita, 1999. "The Highs and Lows of the Minimum Wage Effect: A Time-Series Cross-Section Study of the Canadian Law," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 318-50, April.
  16. Gron, Anne & Swenson, Deborah L, 1996. "Incomplete Exchange-Rate Pass-Through and Imperfect Competition: The Effect of Local Production," American Economic Review, American Economic Association, vol. 86(2), pages 71-76, May.
  17. Sullivan, Daniel, 1985. "Testing Hypotheses about Firm Behavior in the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 586-98, June.
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Cited by:
  1. Madeline Zavodny, 1998. "Why minimum wage hikes may not reduce employment," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 18-28.

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