Acton Institute Powerblog

Study: How minimum wage increases hurt consumers and the poor

In surveying the damage caused by arbitrary increases to the minimum wage, our attention is typically drawn to stunted job growth among low-skilled workers or tragic tales of shuttered businesses.

But are there other deleterious effects beyond those felt in business and the labor market? What about the impact on the actual price of goods? We are constantly told that businesses will simply “pass along the costs” to the consumer, but does the data actually prove that out? If so, which consumers are hurt the most?

In a new working paper from the University of Zurich, researchers Tobias Renkinb, Claire Montialouxc, and Michael Siegenthaler seek to uncover the answers, focusing specifically on the impact of minimum wage increases on grocery store prices.

Analyzing scanner data in relation to “166 minimum wage increases and 62 legislative events in the US,” the study comes to the conclusion that consumers bear the bulk of the cost from such increases. “Moreover,” they explain, “poor households are most negatively affected by the price response.”

The researchers summarize their findings as follows:

First, the minimum wage elasticity of prices is about 0.02. We estimate the minimum wage elasticity of cost as well, and find that this elasticity is roughly the same size. Our results are consistent with a full pass-through of cost increases to consumers.

Second, we find that the response to minimum wage increases happens around the time of passage of legislation, rather than at the time of implementation of hikes. This result suggests that grocery stores set their prices in a forward-looking manner and confirms a key prediction of macroeconomic models with nominal frictions.

Third, we show that the price response of grocery stores affect the poorest households the most. In particular, price increases offset about 10% of the average nominal gains from minimum wage increases for households in this bracket. Overall, the price response lowers the benefits of minimum wage increases, and makes them less redistributive in real than in nominal terms.

As it relates specifically to the impact on the poor, it’s worth noting that, as David Trilling explains, “In real terms — after factoring in inflation — the amount offset, or canceled, is even larger. After factoring in price responses elsewhere in the economy, more of the gain from the minimum-wage increase is erased.”

This doesn’t negate the problems posed to labor and businesses, of course, but it may indicate a more limited scope of impact. Regardless of which area bears the greater pain, the findings affirm and highlight the same lesson: prices are not play things.

Despite whatever qualms we may have with the “fairness” of this or that employer’s wages (or, in this case, a grocery store’s prices), studies like this further demonstrate that our attempts to subvert and manipulate these signals “on behalf of the poor” most typically lead to more convoluted illusions, behind which the suffering continues.

“Minimum wage increases are frequently proposed as a measure to address growing wage inequality,” the paper concludes. “Our results suggest that one needs to consider the effects of minimum wages on prices to fully judge their effectiveness as a redistributive policy. In particular, we show that price effects especially reduce the effectiveness of minimum wages as an anti-poverty tool.”

Image: LukeErickson, CC0

Joseph Sunde

is an associate editor and writer for the Acton Institute. His work has appeared in venues such as The Federalist, First Things, The Christian Post, The Stream, Intellectual Takeout, Foundation for Economic Education, Patheos, LifeSiteNews, The City, Charisma News, The Green Room, Juicy Ecumenism, Ethika Politika, Made to Flourish, and the Center for Faith and Work. Joseph resides in Minneapolis, Minnesota with his wife and four children.