Ebook The Minimum Wage, Restaurant Prices, and Labor Market Structure
This paper utilizes unique data to test whether restaurant prices respond to minimum wage changes. We find that restaurant prices unambiguously rise after minimum wage increases are enacted. Furthermore, these price increases are larger for establishments that are more likely to pay the minimum wage.
These results are derived from a panel of store-level restaurant prices that are the basis for the fotxl away from home component of the Consumer Price Index (CPI) during a three-year period with two federal minimum wage increases, and are corroborated using a longer panel of city-level food away from home pricing from the CPI.
Because of the breadth of our price data, we can take advantage of several sources of variation. First, some states set their minimum wage above the Federal level. Second, we can distinguish restaurants that tend to pay the minimum wage from those that do not. Third, the fraction of workers paid at or near the minimum wage varies across geographic areas. All three sources of variation indicate that most, if not all. of the higher labor costs faced by employers are pushed onto customers in the form of higher prices.
As suggested by Brown ( 1999), the size and sign of these price responses can be used to infer whether monopsony power is important for understanding the employment response to minimum wage hikes. The minimum wage literature has become contentious because Card and Krueger's (for example. 1995,20(X)) research found that an increase in the minimum wage has no, or even a small positive, effect on employment. Therefore, their research contradicts standard models of competitive labor markets, which, prior lo their work, most researchers suspected was relevant for industries which primarily employed minimum wage workers.
However, their results are consistent with monopsony power in the labor market, as Stigler ( 1946) discussed many years ago. The diverse findings reported in the Hurry of replies to their work ( for example, Neumark and Wascher 1996.2(XX); Deere. Murphy, and Welch 1995; Kim and Taylor 1995: Burkhauser. Couch, and Wittenburg 20(K): Dickens, Machin, and Maiming 1999) led one observer to note that "[Card and Krueger's) lasting contribution may well be to show that we just don't know how many jobs would be lost if the minimum wage were increased ... and that we are uni ikely to tind out by using more sophisticated methods of inference on the existing body of data. What is needed is more sophisticated data" (Kennan 1995).
Restaurant prices complement the existing evidence on employment responses because, as we show below, output prices and employment are unambiguously negatively related in response to an exogenous change in wage rates. In order to show this relationship, we introduce a general model of employment determination that allows for a range of output and input market structures. Part of the reasoning behind the negative relationship between output prices and employment is based on the negative relationship between prices and output. We also add some weak assumptions to the model to show that output and labor input are positively related. Therefore, if the output price rises in response to a minimum wage hike, both output and labor input have fallen. This will be the case if labor markets are competitive. Conversely, if the output price falls in response to a minimum wage hike, total output and labor input have increased. This will potentially be the case if firms have monopsony power in the labor market.
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