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Who pays for the minimum wage?

Journal article | American Economic Review

This paper provides a comprehensive assessment of the margins along which firms responded toa large and persistent minimum wage increase in Hungary. We show that employment elasticitiesare negative but small even four years after the reform; that around 75 percent of the minimumwage increase was paid by consumers and 25 percent by firm owners; that firms responded to theminimum wage by substituting labor with capital; and that dis-employment effects were greater inindustries where passing the wage costs to consumers is more difficult. We estimate a model withmonopolistic competition to explain these findings.