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How Firms Construct Price Changes: Evidence from Restaurant Responses to Increased Minimum Wages

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  • James M. MacDonald
  • Daniel Aaronson

Abstract

We use price data underlying the Consumer Price Index to assess how restaurants, whose prices are generally quite sticky, respond to minimum wage increases. Aggregate prices rise, quickly, by amounts reflecting the increase in costs, and they rise more among fast food outlets and in low-wage locations. But restaurants do not construct price increases by raising all their prices by amounts reflecting the increase in wages. Instead, they raise only some prices, but by larger amounts. Prices at cluster points are less likely to be changed, and prices that were recently increased (decreased) are less (more) likely to be raised. Copyright 2006, Oxford University Press.

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  • James M. MacDonald & Daniel Aaronson, 2006. "How Firms Construct Price Changes: Evidence from Restaurant Responses to Increased Minimum Wages," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(2), pages 292-307.
  • Handle: RePEc:oup:ajagec:v:88:y:2006:i:2:p:292-307
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2006.00859.x
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    1. Denis Fougère & Erwan Gautier & Hervé Le Bihan, 2010. "Restaurant Prices and the Minimum Wage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1199-1234, October.
    2. Arango-Thomas, Luis Eduardo & Ardila, Luz Karine & Gómez, Miguel Ignacio, 2011. "Efecto del cambio del salario mínimo en el precio de las comidas fuera del hogar en Colombia," Chapters, in: López Enciso, Enrique & Ramírez Giraldo, María Teresa (ed.), Formación de precios y salarios en Colombia T.2, volume 2, chapter 21, pages 873-918, Banco de la Republica de Colombia.
    3. Mustafa Utku Özmen, 2020. "In Pursuit Of Understanding Markups In Restaurant Services Prices," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(06), pages 1423-1437, December.
    4. Calderón Cerbón Mariana & Cortés Espada Josué Fernando & Pérez Pérez Jorge & Salcedo Alejandrina, 2022. "Disentangling the Effects of Large Minimum Wage and VAT Changes on Prices: Evidence from Mexico," Working Papers 2022-13, Banco de México.
    5. Jonathan Wadsworth, 2010. "Did the National Minimum Wage Affect UK Prices?," Fiscal Studies, Institute for Fiscal Studies, vol. 31(1), pages 81-120, March.
    6. James Buszkiewicz & Cathy House & Anju Aggarwal & Mark Long & Adam Drewnowski & Jennifer J. Otten, 2019. "The Impact of a City-Level Minimum Wage Policy on Supermarket Food Prices by Food Quality Metrics: A Two-Year Follow Up Study," IJERPH, MDPI, vol. 16(1), pages 1-14, January.
    7. , & ,, 2014. "Regular prices and sales," Theoretical Economics, Econometric Society, vol. 9(1), January.
    8. George L. Wehby & Dhaval M. Dave & Robert Kaestner, 2020. "Effects of the Minimum Wage on Infant Health," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 39(2), pages 411-443, March.
    9. Lu, Fuxiao & Tang, Wansheng & Liu, Guowei & Zhang, Jianxiong, 2019. "Cooperative advertising: A way escaping from the prisoner’s dilemma in a supply chain with sticky price," Omega, Elsevier, vol. 86(C), pages 87-106.
    10. Cabral, Luís & Fishman, Arthur, 2012. "Business as usual: A consumer search theory of sticky prices and asymmetric price adjustment," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 371-376.
    11. Cotti, Chad & Tefft, Nathan, 2013. "Fast food prices, obesity, and the minimum wage," Economics & Human Biology, Elsevier, vol. 11(2), pages 134-147.
    12. Daniel Aaronson & Eric French & James MacDonald, 2008. "The Minimum Wage, Restaurant Prices, and Labor Market Structure," Journal of Human Resources, University of Wisconsin Press, vol. 43(3), pages 688-720.
    13. Erwan Gautier, 2009. "Les ajustements microéconomiques des prix : une synthèse des modèles théoriques et résultats empiriques," Revue d'économie politique, Dalloz, vol. 119(3), pages 323-372.
    14. John Ashton, 2009. "Synchronisation and staggering of interest rate change by UK financial services firms," International Review of Applied Economics, Taylor & Francis Journals, vol. 23(1), pages 55-69.
    15. Emek Basker & Muhammad Taimur Khan, 2016. "Does the Minimum Wage Bite into Fast-Food Prices?," Journal of Labor Research, Springer, vol. 37(2), pages 129-148, June.
    16. Daniel Aaronson & Eric French & James M. MacDonald, 2004. "The minimum wage and restaurant prices," Working Paper Series WP-04-21, Federal Reserve Bank of Chicago.
    17. Allegretto, Sylvia & Reich, Michael, 2016. "Are Local Minimum Wages Absorbed by Price Increases? Estimates from Internet-based Restaurant Menus," Institute for Research on Labor and Employment, Working Paper Series qt1b8985k3, Institute of Industrial Relations, UC Berkeley.
    18. David O. Meltzer & Zhuo Chen, 2011. "The Impact of Minimum Wage Rates on Body Weight in the United States," NBER Chapters, in: Economic Aspects of Obesity, pages 17-34, National Bureau of Economic Research, Inc.
    19. Daniel MacDonald & Eric Nilsson, 2016. "The Effects of Increasing the Minimum Wage on Prices: Analyzing the Incidence of Policy Design and Context," Upjohn Working Papers 16-260, W.E. Upjohn Institute for Employment Research.
    20. John K. Ashton, 2007. "Synchronisation and Staggering of Deposit Account Interest Rate Changes," Working Papers 07-14, Centre for Competition Policy, University of East Anglia.
    21. Thomas MaCurdy, 2015. "How Effective Is the Minimum Wage at Supporting the Poor?," Journal of Political Economy, University of Chicago Press, vol. 123(2), pages 497-545.

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