Pass-through of minimum wages into U.S. retail prices

by on December 5, 2017 at 12:31 am in Data Source, Economics, Law | Permalink

That is studied by Renkin, Montialoux, and Siegenthaler in a recent paper, which is also a job market paper for Tobias Renkin from the University of Zurich.  Here is the abstract:

We study the impact of increases in local minimum wages on the dynamics of prices in local grocery stores in the US during the 2001-2012 period. We find a signifi cant impact of increasing minimum wages on prices in grocery stores. Our baseline estimate of the minimum wage elasticity of grocery prices is 0.02. This magnitude is consistent with a full pass-through of cost increases into prices. We show that price adjustments occur mostly in the months following the passage of minimum wage legislation rather than at the actual implementation of higher minimum wages. This forward-looking pattern of price adjustments is qualitatively consistent with pricing models that feature nominal rigidities. We fi nd no differential price effect for products consumed by poorer and richer households, and no evidence for demand effects. Our results suggest that consumers rather than firms bear the cost of minimum wage increases. Moreover, poor households are most negatively affected by the price response. Price increases in grocery stores alone offset at least 10% of the nominal income gains of the poorest households.

Of course this also would suggest the sector is relatively competitive.  And if you are wondering, here is the full slate of job candidates from Zurich.

1 Deepish Thinker December 5, 2017 at 1:19 am

“Price increases in grocery stores alone offset at least 10% of the nominal income gains of the poorest households.”

Assuming of course that there are actually income gains to offset: https://www.seattletimes.com/business/uw-study-finds-seattles-minimum-wage-is-costing-jobs/

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2 Mulp December 5, 2017 at 4:08 am

The jobs weren’t lost, just outsourced. Like jobs outsourced to Mexico or India. The low skill jobs were replaced with higher skill jobs. Employers outside Seattle get the unskilled workers to train for Seattle jobs in several years.

And higher skill, higher pay workers will chose to work fewer hours.

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3 TMC December 5, 2017 at 8:19 am

How about ‘The many low skill jobs were replaced with fewer higher skill jobs.’

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4 Jacob December 5, 2017 at 10:29 am

“The low skill jobs were replaced with higher skill jobs. Employers outside Seattle get the unskilled workers to train for Seattle jobs in several years.”

*Citation needed…

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5 Denis Drew December 5, 2017 at 10:07 am

FIRST look at 16,000 few jobs under $13/hr — 39,000-23,000
THEN 6,000 fewer jobs under $19/hr — 93,000-87,000
looks like bracket creep

44,000 more jobs altogether — 292,000-336,000
MEANING 50,000 more jobs over $19/hr (6,000 lost below that line means 50,000 occurred above)
looks like bracket LEAP!
http://angrybearblog.com/2017/06/seattle-minimum-wage.html
* * * * * *
2.6% unemployment rate
https://www.google.com/search?q=seattle+unemployment+rate&ie=utf-8&oe=utf-8
* * * * * *
$80,000 median household income (up $9,374 since 2014 — US HH median $56,000)
http://www.seattletimes.com/seattle-news/data/80000-median-wage-income-gain-in-seattle-far-outpaces-other-cities/
* * * * * *
more construction cranes working than any other US city
Seattle 58
Los Angeles 36
Denver 35
Chicago 34
Portland 32
San Francisco 22
Washington, DC 20
New York 18
Honolulu 10
Austin 9
Boston 7
Phoenix 5
http://ritholtz.com/2017/07/where-the-cranes-are/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

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6 Bill December 6, 2017 at 10:39 pm

Remind me to never sit next to you on a long flight.

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7 Axa December 5, 2017 at 2:32 am

Food spending is 1/3 of income for poor people. What about the other 2/3? Do rent and gas increase with minimum income?

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8 Maxwell December 5, 2017 at 11:22 am

My first guess would be to say the increases for those goods will not be as large. The price effects will probably be concentrated in industries that hire a large percentage of minimum wage workers (like super markets).

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9 Floccina December 5, 2017 at 12:03 pm

Do rent and gas increase with minimum income?

I do not know but would strongly expect that in a supply constrained real estate market like San Fransisco, NY city, Boston, that much of any minimum wage increase would be captured by landlords in the long run.

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10 Mulp December 5, 2017 at 3:53 am

Tanstaafl

“Price increases in grocery stores alone offset at least 10% of the nominal income gains of the poorest households.”

Clearly, wealthy high income conservative believe the working poor are better off earning 90% lower net wage increases.

Oddly, conservatives find low wage worker to be bad customers and if required to do business with them want government handouts. Eg, Walmart opposes higher minimum wages but wants bigger food stamp benefits to boost Walmart profits – Walmart cashes the most food stamps of any retailer.

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11 GoneWithTheWind December 5, 2017 at 10:03 am

“Walmart cashes the most food stamps of any retailer.” Well duh! They are the biggest retailer. But more than that they give better value to their customers, low prices and more product choices. It is ironic isn’t it that they can do this because they keep their costs low. And they keep their costs low by keeping their cost of labor low. Seems like a good business model that is a big win for customers.

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12 chuck martel December 5, 2017 at 5:31 am

Our results suggest that consumers rather than firms bear the cost of minimum wage increases.

It would be unlikely to be otherwise. If electricity and gas rates go up, those too will be passed along to consumers.

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13 NPW December 5, 2017 at 6:30 am

It takes a special kind of self-delusion to come to any other conclusion.

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14 rayward December 5, 2017 at 7:00 am

I’m not sure picking a period that includes the worst economic crisis in generations is the best approach for determining the effect of minimum age increases on prices. Indeed, contrary to economic theory, prices, in particular grocery prices, spiked during the great recession. https://en.wikipedia.org/wiki/2007%E2%80%9308_world_food_price_crisis I’m reminded of the weatherman with the best record for weather forecasts. His secret? He looked out the window and if it was cloudy, he forecast rain.

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15 Nick December 5, 2017 at 7:02 am

To the extent that a high minimum wage increases prices for consumer goods and makes consumption relatively less attractive, couldn’t that be argued as a win-win situation, as that means people would be relatively more incentivized to save?

Call it a sort of Christian/Economics crossover– materialism is immoral crossed with savings is better than consumption.

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16 Eli December 5, 2017 at 8:40 am

It’s not a win for the people who can no longer afford to buy basic necessities.

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17 Nicholas Tackett December 5, 2017 at 8:44 am

Who can no longer afford basic necessities? Especially if all of the working poor are seeing a wage increase.

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18 Joshua December 5, 2017 at 7:05 am

So does the 0.02 number imply that 2% of the cost of food at a grocery store is wages of the employees?

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19 Jolyon December 5, 2017 at 7:42 am

Strongly doubt that

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20 abqhudson December 5, 2017 at 8:55 am

Just like taxes on Corporations – these costs are always passed on to consumers. Demagogue politicians be damned.

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21 Floccina December 5, 2017 at 1:05 pm

I think that in the short run taxes on Corporations fall on owners, though I agree in the long run they fall on customers.

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22 albigensian December 5, 2017 at 10:07 am

The question is, when will grocery stores follow airlines and unbundle their prices?

When will it cost a little extra to use a crewed checkout instead of the self-check? Could they charge for the use of a shopping cart, or is that cost fully covered by the advertising on that cart? What about that parking space? Time-of-day (and/or day-of-week) surcharge/discount pricing?

And what about freshness? It’s no secret that groceries put older product at the front of the shelf, or that some shoppers reach into the back to get fresher product. Instead of just marking down product that’s near its sell-by date, why not just charge a little more for newer product?

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23 Sigivald December 5, 2017 at 1:54 pm

How do you, the checker, know where that apple or banana came from?

The labor to re-tag things alone would eat any profit increase or cost-covering.

Remember transaction costs exist, and that bien pensants are Very Strongly Against actually revealing various costs by pricing them.

(“Evil grocers make poor people pay more for fresh fruit or to use a shopping cart!!!”)

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24 Floccina December 5, 2017 at 12:48 pm

That is what I would expect, the real question is, do those higher prices cause lower unit consumption leading to job losses.

Also if we think of gap between what the market wage and minimum wage as a tax, why should it be target at consumers who use more low wage labor.

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25 Floccina December 5, 2017 at 12:52 pm

One other thing is that I think very low employment effect is more important than the gains to low wage workers from the raise. Idle hands being the devils work shop.

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26 Lord December 5, 2017 at 12:49 pm

May be a wash for the poor then, but that doesn’t mean they wouldn’t prefer it. It is also a productivity standard and they may welcome shorter hours at higher pay to longer hours at lower pay. Since the poor spend more than 10% on food, only 10% would actually be somewhat positive for them.

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27 Yancey Ward December 5, 2017 at 12:49 pm

Selling groceries has always been a low margin retail business- almost literally cut throat in nature. It is just an unfortunate fact that poor people spend higher percentages of income on food.

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28 Sigivald December 5, 2017 at 1:52 pm

“Our results suggest that consumers rather than firms bear the cost of minimum wage increases

Surprising absolutely no-one?

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29 Donald Pretari December 5, 2017 at 5:09 pm

Of course, the owners do directly pay for all those subsidies that allow all sorts of groceries to be sold cheaply. Or not. But that doesn’t appear to fall into the category of government intervention in the economy. How convenient.

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30 Josh December 5, 2017 at 11:59 pm

So 1) I would expect the price pass through to be basically 100% for large retailers. This is especially true for franchise operations. Franchisees bought into a specific business model with labor as a more or less set % of revenue.

and 2) The “forward-looking” price adjustments are driven by when there is publicity around the minimum wage hike. In my pretty substantial experience with pricing decisions in analytics roles at large retailers, when we were faced with larger minimum wage increases, say > 10%, we took price in two or more rounds.

The two largest price takes were always in the immediate aftermath of the vote passing to increase. Consumers are very aware of the minimum wage increase that passed and are less likely to react negatively. The other time would be the week before the minimum wage goes into effect usually the end of the week between Christmas and New Years, again because of the broad awareness around minimum wage at that time.

There may be a small degree of price-stickiness, but I don’t think that is what explains the phenomenon they are describing. “Menu costs” are a normal part of business for retailers, they have pretty standard periodic shifting of prices or products on a menu, board, display, POP, exterior advertising or what have you. If you are already taking price 4x’s a year, shifting the visual stimuli that consumers interact with 6-8x a year, and changing product offerings somewhat frequently, then I don’t think you can explain the time of price increases

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31 Josh December 6, 2017 at 12:02 am

Oops didn’t finish my thought there.

I don’t think you can explain the time of price increases with price rigidity. It is a customer facing decision, how do we lessen the negative responses from consumers around price increases.

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