Are Local Minimum Wages Absorbed by Price Increases? Estimates from Internet-based Restaurant Menus

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Abstract

We analyze 844 Internet-based restaurant menus that we collected before and after San Jose, CA implemented a 25 percent minimum wage increase in 2013. Our estimated minimum-wage price elasticities are: 0.058 for restaurants 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 estimates are very similar to our estimate of payroll costs increases net of turnover savings, implying that nearly all of the minimum wage increase is passed through to consumers. Equally important, price differences among restaurants 0.5 miles from either side of the policy border are not competed away, indicating that restaurant demand is spatially inelastic. Border effects for restaurants are therefore smaller than is often conjectured. These results imply that citywide minimum wage policies need not result in substantive negative employment effects or shifts of economic activity to nearby areas.

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