The Winners and Losers from Higher Minimum Wages

Vortrag im Rahmen des Brown-Bag Seminars

Abstract:

Governments worldwide discuss the possibility of so-called greedflation - the fear of retailers exploiting unvertainty about inflation rates to increase their profits. In our paper, we show the opposite using minimum wage increases—-varying across states—-as a case in point. We find that retail prices increase due to higher costs, for instance, higher labour costs from minimum wages. Our methodologcial contribution is to combine a difference-in-difference approach with a structural model to identify the effect of minimum wage increases on retail markups and prices. The mechanism is as follows.

Higher minimum wages in grocery retail increase retail prices for two reasons. First, higher minimum wages increase labour costs. This likely leads to incomplete pass-on of labour cost to retail prices. Second, higher minimum wages increase purchasing power and income of "poor" consumers. This, in turn, leads to expansion of demand and thus to higher retail prices.