National Minimum Wage

Chapter 2: The Impact of the National Minimum Wage
2.117 For the most part, it appears that firms may have
found it easier to increase the price of minimum wage
“Members found it difficult
goods and services to consumers rather than to other to pass on cost increases to
businesses. Between 1999 and 2011, prices in
consumers. Consumers were
restaurants and cafes, canteens, hairdressers and dry often ‘trading down’, using
cleaners have all increased faster than CPI. Similarly, ‘stay at home’ entertainment, or
the prices of restaurant, canteen, and takeaway
meals; wine and beer; and personal services have all
attracted only by special deals.”
increased faster than the general level of RPI. The BHA, BBPA, BISL, ALMR oral
cost of employment agencies and security services
also increased above the general increase in SPPI but
the price increases for businesses for industrial
evidence
cleaning, dry cleaning and hotels have been lower than the general increase in prices.
2.118 Firms may have been less able to pass on price rises since the start of the recession.
Between 2007 and 2010, the price rises in the selected minimum wage goods and services
were similar to the general increase in prices, and this has continued in 2011. Price rises for
business-to-business transactions still appear more constrained than price rises to
consumers.
Research on Prices
2.119 We can draw on three studies that shed light on the ability of firms to pass on minimum
wage costs in the form of higher prices to their customers. Wadsworth (2007) investigated
the consumption patterns of minimum wage households and the impact of the minimum
wage on the prices of goods and services that were associated with minimum wage
employment (‘minimum wage goods and services’). Using the Family Expenditure Survey
and its successor the Expenditure and Food Survey, he found that there was little evidence of
differential consumption patterns among households with an adult minimum wage earner
relative to others, although such households appeared to spend a slightly larger proportion of
their income on food compared with households with non-minimum wage workers. He also
found evidence that the demand for many minimum wage goods and services (such as pub
drinks, dry cleaning services and canteen meals) tended to be elastic. That is, demand was
sensitive to price changes, which suggested that there might be little room to pass on price
rises to consumers of minimum wage goods and services.
2.120 In an extension to that work, Wadsworth (2008) defined minimum wage goods and services
using the LFS and ASHE to estimate the employee and wage bill shares relating to minimum
wage workers in disaggregated industries. He then matched these to sectoral level data on
retail and consumer prices. Although he found no evidence of an immediate impact of
changes in the minimum wage on prices, he did find evidence to suggest that the relative
rate of price inflation of some minimum wage goods and services did increase in the period
after the minimum wage was introduced and that prices rose faster for those goods and
services that were not subject to international trade. In a previous study, Draca, Machin and
Van Reenen (2005) had found no significant effects of the minimum wage on prices.
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