What impact does a minimum wage increase have on prices?

FROM the Maine Heritage Policy Center’s Patrick Marvin on proposals to raise the minimum wage:

Broadly, the concept of a minimum wage increase polls well with voters, because on the surface it seems like a common sense quick fix for a real problem to most people.  Unfortunately, this type of a change would instead cause great harm and bring with it several negative consequences.

Marvin outlines some of the negatives, but the one I want to focus in on is the one regarding the minimum wage-price push; where an increase in the minimum wage will result in higher prices.  He writes (my emphasis):

If businesses aren’t able or willing to eliminate jobs, they will have little choice but to greatly increase the costs for the goods and services they provide in order to keep themselves afloat.

This may not sound dramatic, but imagine the impact on your wallet after paying two or three times what you currently pay for goods at the convenience store, or for food at your favorite restaurant.  In 2007, the Federal Reserve Bank of Chicago published a study that found that following a minimum wage increase, restaurant prices went up.

And sure enough, there are several channels by which businesses can absorb higher labor costs, one being pass those costs onto the consumer.  Like the disemployment impacts of minimum wage, the issue here is one of degree.  One might read the above and infer that a minimum wage increase would cause drastic increases in prices.

To support his argument, Marvin cites a 2007 study by Daniel Aaronson et al that estimated the impact of a 10 % increase to the minimum wage on prices at restaurants.  How much of a price increase did that study estimate from a 10% increase in the minimum wage?

For all restaurants, the study estimated that prices would rise 0.7%, with limited service establishments (i.e., fast-food places) seeing price increases of 1.5%, and full-service establishments seeing price increases of 0.3%.  It’s pretty clear why fast-food places would experience a higher price increase; they, typically, use a higher number of minimum wage workers.

The Aaronson paper comports with other research (see here, here, here, and here) that suggests while price increases would likely result, the size of those increases is not drastic.  Of course, the minimum wage increase proposals are much higher than 10%, so the change in prices will be higher than the price increases estimated by Aaronson et al.  How much?  Two other studies looked at the impact of higher minimum wage increases on prices for all sectors of the economy, not just restaurants.  Wolf and Nadiri in a 1981 paper estimated that an increase in the minimum wage of 10 – 25% would icnrease prices 0.3 – 0.4%.  More recently, in 1998, Mark Wilson of the Heritage Foundation estimated that a proposed 19.4% increase in the minimum wage would increase prices 0.2% in the first year of the increase, and 0.1% the second year.

The models used by Wolf and Nadiri, and Wilson used a lower increase than the proposed increase to $15/hr.  But what their estimates suggest is that the impact on prices by wage increases over the 10% modeled by Aaronson et al are still modest (i.e., small).

The impact of a minimum wage increase will vary depending on a number of factors, and for that reason nothing from the above can conclusively state exactly what impact a minimum wage increase will have on prices in generally or in Maine specifically.  However, the research noted above does suggest that price increases would be modest.

John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.