Wednesday, April 22, 2009

Minimum wages and the stickiness of restaurant prices

While the restaurant industry is exempt from minimum wages in the United States (at least for jobs where tipping is prevalent), other countries have binding minimum wage laws for all industries. One common complaint from restaurant owners then is that minimum wages unduly increase their costs and that they have to increase prices accordingly. Well do they?

Denis Fougère, Erwan Gautier and Hervé Le Bihan look at restaurant prices collected for the computation of the consumer price index in France and find that it takes a full year for minimum wage increases to be reflected in menu prices. From this we can learn many things: 1) menu costs are important; 2) restaurant owners have sufficient margins to absorb such cost increases, despite their claims. The second point is more of anecdotal nature, while the first merits discussion.

There is a long standing debate whether prices are sticky or not. One of the main justification for stickiness, menu costs, takes its name from the cost of determining new prices and printing new menus in a restaurant. So there is no reason to act surprised that one finds some price stickiness in the prime case for price stickiness. It is like finding that water is wet. Find me price stickiness in a market known for flexibility, and then I would be convinced.


Gabriel said...

What about the Bils and Klenow supermarket scanner data? IIRC the median price change frequency is 4 months? Looks like S,s, smells like S,s... maybe.

Vilfredo said...

Maybe it is S,s, but that does not yet mean it is a rigidity strong enough to have any quantitatively important impact on an economy or policy.