“Minimum Wage and Real Wage Inequality: Evidence from Pass-Through to Retail Prices”

Justin Hilyin Leung, University of Chicago 

Minimum wage policies are frequently cited by advocates as an anti-poverty tool. Essential to assessing this claim is to find out who benefits and who bears the costs of minimum wage changes. While a longstanding debate over the employment effects of the minimum wage has yet to reach a consensus, a smaller literature on its effect on prices has generally found small but positive effects. This paper adds to the existing literature by jointly considering the impact of the minimum wage on both labor and product markets, using detailed scanner data on purchase transactions of retail goods at the store level to overcome data problems in the previous literature. I provide empirical evidence that the minimum wage pass-through to retail prices in grocery stores is larger than expected because the minimum wage not only raised labor costs but also increased product demand, especially in poorer regions. This points to novel channels of heterogeneity in pass-through that have distributional consequences, with key implications for real wage inequality, residential segregation, and future minimum wage increases.