Minimum Wages in US – No effect on prices of changes similar to those observed historically research finds

Minimum wage policy attracts an enormous amount of attention in the United States. Between January 2014 and July 2015, the effective minimum wage in- creased in 26 states, and as of January 2015, 75% of Americans supported an increase in the federal minimum wage to over twelve dollars per hour. Researchers have responded to this interest, producing a massive literature exploring the effects of minimum wage changes. However, the vast majority of publications focus on possible disemployment effects without considering other economic channels. Past minimum wage research almost exclusively examined employment and wage effects, focusing on the food services industry.

While businesses may adjust labor usage in response to an increased minimum wage, minimum wage hikes could also cause changes in prices or lower firm profitability. Price changes could have important ramifications for consumer welfare, especially if they are large in order to compensate for higher costs. This is frequently cited as an argument against minimum wage hikes, but its empirical signif- icance remains mostly unexamined.

Minimum wage hikes can increase prices through two main channels. The first, and most obvious, is through increased production costs. If inputs are imperfectly substitutable, higher wages lead to higher marginal costs. These marginal costs can either be passed on to consumers or absorbed by decreased margins and profits. The second pass-through channel is through changes in demand, where a subset of households experience higher incomes and increase their demand for a variety of items. Although both channels are likely to drive up prices, the degree of increase is an empirical question.

Outside of food services, the extent of price responses to minimum wage increases has mostly been ignored. We focus on the retail sector, a major employer of minimum wage workers, and more specifically on grocery stories and wholesale clubs. Using a variety of identification strategies, we find minimal pass-through of minimum wage changes onto prices. This finding persists across different timing assumptions, sub-samples, and hetero- geneity checks. The appendices contain even more heterogeneity and robustness checks, including use of price indices instead of UPC-level price data, checking for heterogeneity by store size, checks of the cross-border differences-in-differences assumptions, and looking for demand-side responses to minimum wage hikes.

We show that the lack of response is rationalized by the relative low impact of minimum wage increases on total firm costs. Combining the labor share of to- tal costs with the labor cost elasticity with respect to the minimum wage, even a fully passed through typical minimum wage hike would increase overall costs by approximately 0.1%. Estimates from other industries suggest that, aside from the restaurant and fast-food sectors, the minimal effect on prices will hold more gener- ally. Prior, larger estimates have mostly come from the food services industry, but our findings show that these should not be extrapolated to the wider economy.

These findings have important implications for policy. One frequently cited argument against minimum wage increases is that they may lead to price inflation, and that this price inflation may disproportionately affect low income households. This paper provides evidence against that argument, using data from a sector that is particularly important for lower income households. It is important to note that all of the minimum wage increases in the data are less than 35% of the pre-existing rate. Although we do not find differential responses based on the size of the minimum wage increase, many recently proposed changes, such as a national minimum wage of $15, are well outside of our ability to make predictions. In those cases, a greater proportion of workers will be affected, leading to an increased labor cost elasticity and larger effect on total costs. However, the data clearly demonstrate that in the case of minimum wage changes similar to those observed historically, economy-wide price responses will be muted.

via Minimum Wage and Retail Price Pass-Through: Evidence and Estimates from Consumption Data by Sharat Ganapati, Jeffrey Weaver :: SSRN