The Effect of Minimum Wage Increase on Prices: A Case Study of Census Divisions In the United States throughout the 2000’s

Abstract

This paper attempts to reinvent the landmark paper by Card and Krueger (1994) on the effects of the minimum wage on employment. Instead of focusing on employment, however, the variable of interest is average prices, thus getting a sense of the effect on overall inflation. States are paired together by census divisions. A difference-in-difference model is used, having one state in each division as the treatment state that underwent a minimum wage change and the other as a control. The model was run several times with varying inputs. When census divisions were regressed separately with a two year period (one before and one after the minimum wage change), no significant effect was found. Over the short term, the minimum wage had no effect on prices. The final regression pass revealed significant positive difference-in-difference estimations. This final regression used every census division together along with seven years per state that were designated either before or after a minimum wage change. There are many possible factors that could affect prices over such a long period of time, and so this paper finds no evidence of a relationship between the minimum wage and prices based on short term results.