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The Minimum Wage, Restaurant Prices, and Labor Market Structure

55 Pages Posted: 11 Dec 2004 Last revised: 14 Jul 2011

Daniel Aaronson

Federal Reserve Bank of Chicago

Eric French

Federal Reserve Bank of Chicago; Department of Economics

James M. MacDonald

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Date Written: August 3, 2007

Abstract

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.

Keywords: Minimum wage, prices, monopsony

JEL Classification: E30, J23, J42

Suggested Citation

Aaronson, Daniel and French, Eric and MacDonald, James M., The Minimum Wage, Restaurant Prices, and Labor Market Structure (August 3, 2007). FRB of Chicago Working Paper No. 2004-21. Available at SSRN: https://ssrn.com/abstract=630515 or http://dx.doi.org/10.2139/ssrn.630515

Daniel Aaronson (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States

Eric French

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States
312-322-5322 (Phone)
312-322-5111 (Fax)

Department of Economics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

James M. MacDonald

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
(202) 694-5610 (Phone)

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