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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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    References listed on IDEAS

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    Cited by:

    1. Jonathan Wadsworth, 2010. "Did the National Minimum Wage Affect UK Prices?," Fiscal Studies, Institute for Fiscal Studies, vol. 31(1), pages 81-120, March.
    2. Heidhues, Paul & Koszegi, Botond, 2014. "Regular prices and sales," Theoretical Economics, Econometric Society, vol. 9(1), January.
    3. 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.
    4. Wehby, George & Dave, Dhaval M. & Kaestner, Robert, 2016. "Effects of the Minimum Wage on Infant Health," IZA Discussion Papers 10039, Institute for the Study of Labor (IZA).
    5. 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.
    6. Denis Fougere & Erwan Gautier & Herve Le Bihan, 2010. "Restaurant Prices and the Minimum Wage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1199-1234, October.
    7. 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.
    8. Luis Eduardo Arango & Luz Karine Ardila & Miguel Ignacio Gömez, 2010. "Efecto del cambio del salario mínimo en el precio de las comidas fuera del hogar en Colombia," Borradores de Economia 584, Banco de la Republica de Colombia.
    9. 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.
    10. 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 and Journal Articles 16-260, W.E. Upjohn Institute for Employment Research.
    11. 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.
    12. Cotti, Chad & Tefft, Nathan, 2013. "Fast food prices, obesity, and the minimum wage," Economics & Human Biology, Elsevier, vol. 11(2), pages 134-147.
    13. 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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