Price pass-through and minimum wages
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.
|Date of creation:||1997|
|Date of revision:|
|Contact details of provider:|| Postal: P.O. Box 834, 230 South LaSalle Street, Chicago, Illinois 60690-0834|
Web page: http://www.chicagofed.org/
More information through EDIRC
|Order Information:|| Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gron, Anne & Swenson, Deborah L, 1996. "Incomplete Exchange-Rate Pass-Through and Imperfect Competition: The Effect of Local Production," American Economic Review, American Economic Association, vol. 86(2), pages 71-76, May.
- Timothy J. Besley & Harvey S. Rosen, 1998.
"Sales Taxes and Prices: An Empirical Analysis,"
NBER Working Papers
6667, National Bureau of Economic Research, Inc.
- Katz, L.F. & Krueger, A.B., 1992.
"The Effect of the Minimum Wage on the Fast Food Industry,"
Harvard Institute of Economic Research Working Papers
1584, Harvard - Institute of Economic Research.
- Lawrence F. Katz & Alan B. Krueger, 1992. "The Effect of the Minimum Wage on the Fast-Food Industry," ILR Review, Cornell University, ILR School, vol. 46(1), pages 6-21, October.
- Lawrence F. Katz & Alan B. Krueger, 1992. "The Effect of the Minimum Wage on the Fast Food Industry," NBER Working Papers 3997, National Bureau of Economic Research, Inc.
- Jean Baldwin Grossman, 1983. "The Impact of the Minimum Wage on Other Wages," Journal of Human Resources, University of Wisconsin Press, vol. 18(3), pages 359-378.
- Stern, Nicholas, 1987. "The effects of taxation, price control and government contracts in oligopoly and monopolistic competition," Journal of Public Economics, Elsevier, vol. 32(2), pages 133-158, March.
- David C. Parsley & Shang-Jin Wei, 1996.
"Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 111(4), pages 1211-1236.
- David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Papers 5654, National Bureau of Economic Research, Inc.
- 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.
- Sumner, Daniel A, 1981. "Measurement of Monopoly Behavior: An Application to the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 1010-19, October.
- David Neumark & William Wascher, 1992. "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws," ILR Review, Cornell University, ILR School, vol. 46(1), pages 55-81, October.
- Michael L. Katz & Harvey S. Rosen, 1983. "Tax Analysis in an Oligopoly Model," NBER Working Papers 1088, National Bureau of Economic Research, Inc.
- Baker, Michael & Benjamin, Dwayne & Stanger, Shuchita, 1999. "The Highs and Lows of the Minimum Wage Effect: A Time-Series Cross-Section Study of the Canadian Law," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 318-50, April.
- Karp, Larry & Perloff, Jeffrey M, 1987.
"Estimating market structure and tax incidence: the Japanese television market,"
Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series
qt8769c17g, Department of Agricultural & Resource Economics, UC Berkeley.
- Karp, Larry S & Perloff, Jeffrey M, 1989. "Estimating Market Structure and Tax Incidence: The Japanese Television Market," Journal of Industrial Economics, Wiley Blackwell, vol. 37(3), pages 225-39, March.
- Jaewoo Lee, 1997. "The Response Of Exchange Rate Pass-Through To Market Concentration In A Small Economy: The Evidence From Korea," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 142-145, February.
- Sullivan, Daniel, 1985. "Testing Hypotheses about Firm Behavior in the Cigarette Industry," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 586-98, June.
- Delipalla, Sofia & Keen, Michael, 1992.
"The comparison between ad valorem and specific taxation under imperfect competition,"
Journal of Public Economics,
Elsevier, vol. 49(3), pages 351-367, December.
- Sofia Delipalla & Michael Keen, 1991. "The Comparison Between Ad Valorem and Specific Taxation under Imperfect Competition," Working Papers 821, Queen's University, Department of Economics.
- repec:fth:prinin:298 is not listed on IDEAS
- repec:pri:indrel:298 is not listed on IDEAS
- Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
- Besley, Timothy, 1989. "Commodity taxation and imperfect competition : A note on the effects of entry," Journal of Public Economics, Elsevier, vol. 40(3), pages 359-367, December.
When requesting a correction, please mention this item's handle: RePEc:fip:fedhma:wp-97-03. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores)
If references are entirely missing, you can add them using this form.