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 significant 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 price-setting models that feature nominal rigidities. We find 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.Media coverage: Marginal Revolution, National Affairs Findings Blog
We use a novel data set of linked import, export and domestic prices to study firms' exchange rate pass-through after an unexpected and permanent appreciation of the Swiss Franc by about 10% in January 2015. We find low pass-through for firms pricing their product in domestic currency (CHF) and much larger pass-through rates for firms that price their products in foreign currency (EUR). The differences persist even when conditioning on price changes and last until the end of the sample period two years after the appreciation. Our price data allows us to study the relationship between export, domestic and import prices in detail at the firm level. We find that export prices are closely linked to domestic prices when both are set in domestic currency, but not when the export price is set in foreign currency. Moreover, we find that exchange rate pass-through of firms that set prices in domestic currency can be fully explained by variation in import prices, suggesting that strategic complementary with prices of foreign competitors is low. For firms who set prices in foreign currency, strategic complementary appears to be more important.
We study the employment response of Swiss manufacturing firms to an unexpected and permanent appreciation of the Swiss Franc by about 10% in January 2015. We use an original identification strategy that is particularly suited to a small open economy such as Switzerland, where most firms face intense international competition either in export markets or through import competition. Instead of relying on variation in export exposure within Switzerland, we match Swiss firms with a control group of similar firms in neighboring Austria. We find that prior to the appreciation, employment in Austrian and Swiss firms co-moves closely. Employment in Swiss firms drops immediately after the appreciation, while it remains on a stable trend in Austria. Relative to the counterfactual of a constant exchange rate, the appreciation reduces firms' employment by 4% on average. The effects are more pronounced for larger firms and firms that grew strongly before the appreciation. In contrast, we find no effects on small firms. Preliminary results suggest that the employment decline in Swiss firms is driven by a decrease in hiring rather than layoffs. We plan to extend our data to include wages and aim to relate the employment response to stickiness of nominal wages.
During recessions, consumers reduce their consumption of different products depending on the decline in their income and the income elasticity of demand of a product. Importantly, the income elasticity of demand varies between products. In this paper, I use variation in the income elasticity of market demand to identify how prices of products sold in US grocery stores respond to demand shocks. I use retail scanner data that covers prices and quantities of products sold in US grocery stores. My results suggest that the price response to a positive cyclical demand shock is zero or negative. The results are in line with theories that feature countercyclical markups.