The Impact of Minimum Wage on Prices and Households’ Purchasing Power.

The economic literature that studies the impact of minimum wage increases on prices typically focuses on specific industries or jobs, using only partial information. In this document, we estimate the minimum wage pass-through effect on the price level using disaggregated information from the Peruvian CPI and considering the heterogeneous industries' exposure to changes in the minimum wage. We construct the following industry-specific exposure indicators to the minimum wage based on household and enterprise surveys, as well as the input-output table: (i) workers that earn the minimum wage as a percentage of the total workers in that industry; (ii) the sum of labor costs of workers who earn the minimum wage as a percentage of the total costs; and (iii) an indicator that also captures the indirect effects of minimum wages increases through input expenditures. Our findings suggest that the minimum wage pass-through increases along with our exposure indicators. The estimated pass-through is higher in industries with a larger domestic content share and lower price-rigidity goods. Thus, a 10 percent increase in the minimum wage is associated with a 0.73 pp. increase in the CPI one year from now. Finally, after considering the income distribution by income quintiles of workers who earn the minimum wage, we find that a minimum wage rise is associated with a reduction in the real income of the poorer households.