Does increasing the minimum wage lead to higher prices?

Many business leaders fear that any increase in the minimum wage will be passed on to consumers through price increases thereby slowing spending and economic growth, but that may not be the case. New research shows that the pass-through effect on prices is fleeting and much smaller than previously thought.

In a new Upjohn Institute working paper, Daniel MacDonald and Eric Nilsson, of California State University, Bernardino, advance the literature on price effects of minimum wage increases.

Historically, minimum wage increases were large, one-shot changes imposed with little advance notice for businesses. But many recent state and city-level minimum wage increases have been scheduled to be implemented over time and often are indexed to some measure of price inflation. These small, scheduled minimum wage hikes seem to have smaller effects on prices than large, one-time increases.

By looking at changes in restaurant food pricing during the period of 1978–2015, MacDonald and Nilsson find that prices rose by just 0.36 percent for every 10 percent increase in the minimum wage, which is only about half the size reported in previous studies. They also observe that small minimum wage increases do not lead to higher prices and may actually reduce prices. Furthermore, it is also possible that small minimum wage increases could lead to increased employment in low-wage labor markets.

While federal and state minimum wage increases appear to produce similar results, more research is needed to fully grasp the effects of city minimum-wage raises.

Read The Effects of Increasing the Minimum Wage on Prices: Analyzing the Incidence of Policy Design and Context, by Daniel MacDonald and Eric Nilsson.

Other research on the effects of raising the minimum wage.