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IZA
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The Effect of the Minimum Wage on Prices
by
Sara Lemos
(March 2004)
published as: 'A Survey of the Effects of the Minimum Wage on Prices' in: Journal of Economic Surveys, 2008, 22(1), 187-212.
Abstract:
It is well established in the international literature that minimum wage increases compress the
wages distribution. Firms respond to these higher labour costs by reducing employment,
reducing profits, or raising prices. While there are hundreds of studies on the employment
effect of the minimum wage, there is less than a handful studies on its profit effects, and only
a couple of dozen studies on its price effects. Not only is the literature scanty on the minimum
wage price effects, but also it lacks a survey on that. This survey represents an important
contribution to the literature because it summarizes and critically compares over twenty price
effect studies, providing a benchmark in the literature. This survey further contributes to the
literature by offering an input to the recent debate over the direction of employment effects of
the minimum wage. With employment and profits not significantly affected, higher prices is an
obvious response to a minimum wage increase. Moreover, this survey also contributes to the
literature by extending the current understanding on the minimum wage as a policy against
inequality and poverty. If the minimum wage does not cause disemployment but causes
inflation, it might hurt rather than aid the poor, who disproportionately suffer from inflation.
Text: See Discussion Paper No. 1072
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