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The Effect of the Minimum Wage on Prices

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  • Lemos, Sara

    ()
    (University of Leicester)

Abstract

It is well established in the international literature that minimum wage increases compress the wages distribution. Firms respond to these higher labour costs by reducing employment, reducing profits, or raising prices. While there are hundreds of studies on the employment effect of the minimum wage, there is less than a handful studies on its profit effects, and only a couple of dozen studies on its price effects. Not only is the literature scanty on the minimum wage price effects, but also it lacks a survey on that. This survey represents an important contribution to the literature because it summarizes and critically compares over twenty price effect studies, providing a benchmark in the literature. This survey further contributes to the literature by offering an input to the recent debate over the direction of employment effects of the minimum wage. With employment and profits not significantly affected, higher prices is an obvious response to a minimum wage increase. Moreover, this survey also contributes to the literature by extending the current understanding on the minimum wage as a policy against inequality and poverty. If the minimum wage does not cause disemployment but causes inflation, it might hurt rather than aid the poor, who disproportionately suffer from inflation.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1072.

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Length: 20 pages
Date of creation: Mar 2004
Date of revision:
Publication status: published as: 'A Survey of the Effects of the Minimum Wage on Prices' in: Journal of Economic Surveys, 2008, 22(1), 187-212.
Handle: RePEc:iza:izadps:dp1072

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Keywords: employment effect; wage effect; minimum wage; price effect informal sector; cost shock;

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References

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  1. Robert J. Gordon, 1975. "The Impact of Aggregate Demand on Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 613-670.
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  3. Lawrence Katz & Alan Krueger, 1992. "The Effect of the Minimum Wage on the Fast Food Industry," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 678, Princeton University, Department of Economics, Industrial Relations Section..
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  17. 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.
  18. Edward M. Gramlich, 1976. "Impact of Minimum Wages on Other Wages, Employment, and Family Incomes," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(2), pages 409-462.
  19. Douglas O. Staiger & James H. Stock & Mark W. Watson, 1997. "How Precise Are Estimates of the Natural Rate of Unemployment?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 195-246 National Bureau of Economic Research, Inc.
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Cited by:
  1. Nicolás Grau & Oscar Landerretche, 2011. "The Labor Impact of Minimum Wages: A Method for Estimating the Effect in Emerging Economies using Chilean Panel Data," Working Papers, University of Chile, Department of Economics wp329, University of Chile, Department of Economics.
  2. Cuong Nguyen, 2012. "Do minimum wage increases cause inflation? evidence from vietnam," Economics Bulletin, AccessEcon, vol. 32(1), pages A9.
  3. Sara Lemos, 2004. "Anticipated Effects of the Minimum Wage on Prices," Discussion Papers in Economics 04/25, Department of Economics, University of Leicester.
  4. Gabriel Ulyssea & Miguel N. Foguel, 2006. "Efeitos do Salário Mínimo Sobre o Mercado de Trabalho Brasileiro," Discussion Papers, Instituto de Pesquisa Econômica Aplicada - IPEA 1168, Instituto de Pesquisa Econômica Aplicada - IPEA.

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