On This Page1997, No. 1997-03

Price Pass-Through and Minimum Wages
Last Updated: 02/04/97

A textbook consequence of competitive markets is that an industry-wide increase in the price of inputs will be passed on to consumers through an increase in prices. This fundamental implication has been explored by researchers interested in who bears the burden of taxation and exchange rate fluctuations. However, little attention has focused on the price implications of minimum wage hikes. From a policy perspective, this is an oversight. Welfare analysis of minimum wage laws should not ignore consumers. Furthermore, estimates of price shifting can have important implications for wage-push inflation stories, as well as potentially provide an explanation for the small short-run employment effects that have been found in some of the minimum wage literature.