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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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    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.
    2. Simionescu, Mihaela, 2025. "Inflation, financial development, and income/wealth inequality in the European Union," Economic Systems, Elsevier, vol. 49(4).
    3. Robayo, Monica & Zamfir,Madalina & Wronski,Marcin, 2024. "Simulating Aggregate and Distributional Effects of Minimum Wage Increases in Romania : Evidence from Survey and Administrative Tax Data," Policy Research Working Paper Series 10934, The World Bank.

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    Keywords

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    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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