The Minimum Wage, Restaurant Prices, and Labor Market Structure
Federal Reserve Bank of Chicago
Federal Reserve Bank of Chicago; Department of Economics
James M. MacDonald
U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)
August 3, 2007
FRB of Chicago Working Paper No. 2004-21
Using store-level and aggregated Consumer Price Index data, we show that restaurant prices rise in response to minimum wage increases under several sources of identifying variation. We introduce a general model of employment determination that implies minimum wage hikes cause prices to rise in competitive labor markets but potentially fall in monopsonistic environments. Furthermore, the model implies employment and prices are always negatively related. Therefore, our empirical results provide evidence against the importance of monopsony power for understanding small observed employment responses to minimum wage changes. Our estimated price responses challenge other explanations of the small employment response too.
Number of Pages in PDF File: 55
Keywords: Minimum wage, prices, monopsony
JEL Classification: E30, J23, J42
Date posted: December 11, 2004 ; Last revised: July 14, 2011
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