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The Effect of the Minimum Wage on Prices

20 Pages Posted: 1 Apr 2004  

Sara Lemos

University of Leicester; IZA Institute of Labor Economics

Date Written: March 2004

Abstract

It is well established in the international literature that minimum wage increases compress the wages distribution. Firms respond to these higher labour costs by reducing employment, reducing profits, or raising prices. While there are hundreds of studies on the employment effect of the minimum wage, there is less than a handful studies on its profit effects, and only a couple of dozen studies on its price effects. Not only is the literature scanty on the minimum wage price effects, but also it lacks a survey on that. This survey represents an important contribution to the literature because it summarizes and critically compares over twenty price effect studies, providing a benchmark in the literature. This survey further contributes to the literature by offering an input to the recent debate over the direction of employment effects of the minimum wage. With employment and profits not significantly affected, higher prices is an obvious response to a minimum wage increase. Moreover, this survey also contributes to the literature by extending the current understanding on the minimum wage as a policy against inequality and poverty. If the minimum wage does not cause disemployment but causes inflation, it might hurt rather than aid the poor, who disproportionately suffer from inflation.

Keywords: minimum wage, wage effect, employment effect, price effect informal sector, cost shock

JEL Classification: J38

Suggested Citation

Lemos, Sara, The Effect of the Minimum Wage on Prices (March 2004). IZA Discussion Paper No. 1072. Available at SSRN: https://ssrn.com/abstract=524803

Sara Lemos (Contact Author)

University of Leicester ( email )

University Road
Leicester LE1 7RH
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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