Aaronson, Daniel, Eric French, and James MacDonald. 2008. “The Minimum Wage, Restaurant Prices, and Labor Market Structure.” Journal of Human Resources 43(3): 688–720.
Using store-level and aggregated Consumer Price Index data, we show that restaurant prices rise in response to minimum wage increases under several sources of identifying variation. We introduce a general model of employment determination that implies minimum wage hikes cause prices to rise in competitive labor markets but potentially fall in monopsonistic environments. Furthermore, the model implies employment and prices are always negatively related. Therefore, our empirical results provide evidence against the importance of monopsony power for understanding small observed employment responses to minimum wage changes. Our estimated price responses challenge other explanations of the small employment response, too.
Daniel Aaronson is a senior researcher at the Federal Reserve Bank of Chicago. Eric French is a senior researcher at the Federal Reserve Bank of Chicago. James MacDonald is a senior researcher at the Economic Research Service, U.S. Department of Agriculture. Work on the store-level price data was performed under a memorandum of understanding between the Economic Research Service at the Department of Agriculture and the Bureau of Labor Statistics (BLS), which permitted onsite access to the confidential BLS data used in this paper. The authors thank Bill Cook, Mark Bowman, and Scott Pinkerton of the BLS for their advice and help. They also thank Gadi Barlevy, Jeff Campbell, Bob LaLonde, Derek Neal, Dan Sullivan, and seminar participants at multiple settings for helpful comments and Tina Lam for excellent research assistance. The views expressed herein are not necessarily those of the Federal Reserve Bank of Chicago, Federal Reserve System, Bureau of Labor Statistics, or U.S. Department of Agriculture. Comments welcome at efrench@frbchi.org or daaronson@frbchi.org. The publicly available data (city level aggregates) used in this article can be obtained beginning January 2009 through December 2012 from Daniel Aaronson, Federal Reserve Bank of Chicago, 230 S. LaSalle St., Chicago, IL 60604. Telephone (312)322-5650, Fax (312)322-2357.