How Do Retail Prices React to Minimum Wage Increases?

A textbook consequence of an industry-wide cost shock is that it will be passed on to consumers through an increase in prices. The minimum wage offers a compelling natural experiment of such a cost shock, particularly among industries that employ lowwage labor.

We assess the effect of recent minimum wage increases on restaurant prices, using specific item prices collected by the Bureau of Labor Statistics (BLS). We find that price responses follow textbook expectations in several dimensions. First, restaurant prices rise, by amounts that are broadly consistent with the modest costs imposed by minimum wage increases. Second, prices respond rather quickly, within a six-month window around the wage increase. Third, price increases are greater among fastfood outlets and in low-wage locations, where minimum wage increases would be expected to have greater effects on costs.