We study the impact of increases in local minimum wages on the dynamics of prices in local grocery stores in the US during the 2001-2012 period. We find a significant impact of increasing minimum wages on prices in grocery stores. Our baseline estimate of the minimum wage elasticity of grocery prices is 0.02. This magnitude is consistent with a full pass-through of cost increases into prices. We show that price adjustments occur mostly in the months following the passage of minimum wage legislation rather than at the actual implementation of higher minimum wages. This forward-looking pattern of price adjustments is qualitatively consistent with pricing models that feature nominal rigidities. We find no differential price effect for products consumed by poorer and richer households, and no evidence for demand effects. Our results suggest that consumers rather than firms bear the cost of minimum wage increases. Moreover, poor households are most negatively affected by the price response. Price increases in grocery stores alone offset at least 10% of the nominal income gains of the poorest households.
Companies pass the cost on to consumers, and it harms lower-income households disproportionately. So, if employers reduce hiring, low-income households lose income; if employers raise prices, low-income households have to spend more for the same goods. That doesn’t sound like a very helpful policy.
One wrinkle not mentioned is that government gets to win on two fronts. Politicians take credit for “giving” people raises, and then the government itself gets a boost. If income goes up, government gets a bigger income tax take, and if prices go up to pay the salaries, government gets a bigger sales tax take to the extent that the goods are taxable.