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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.

Suggested Citation

  • Daniel Aaronson, 1997. "Price pass-through and minimum wages," Working Paper Series, Macroeconomic Issues WP-97-03, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhma:wp-97-03
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