Panel Paper: Are Local Minimum Wages Absorbed By Price Increases? Estimates from Internet-Based Restaurant Menus

Monday, June 13, 2016 : 9:45 AM
Clement House, 2nd Floor, Room 06 (London School of Economics)

*Names in bold indicate Presenter

Sylvia Allegretto and Michael Reich, Institute for Research on Labor and Employment, University of California, Berkeley
We analyze a large sample (N= 60,509) of Internet-based restaurant menu items that we collected before and after San Jose, CA implemented a 25 percent local minimum wage increase in 2013. Our estimated significant minimum-wage price elasticities are: 0.058 for food service as a whole, 0.083 for limited service restaurants, 0.040 for full-service restaurants, 0.077 for small restaurants, 0.039 for mid-sized restaurants, 0.098 for chains and 0.062 within chain-pairs. These findings imply that a substantial proportion of overall restaurant payroll cost increases, net of turnover savings, are passed through to consumers. Equally important, price differences among restaurants 0.5 miles from either side of the policy border are not competed away. If restaurant demand is spatially inelastic, border effects are much smaller than is often conjectured. Together, these results imply that citywide minimum wage policies need not result in negative employment effects or shifts of economic activity to nearby areas.