Who Pays for the Minimum Wage?

This paper analyzes the eects of a large (~60%) and persistent increase in the minimum wage instituted in Hungary in 2001. We propose a new approach to estimating the employment eects of a minimum wage increase that exploits information on the distribution of wages before and after the policy change. We infer the number of jobs destroyed by comparing the number of pre-reform jobs below the new minimum wage to the excess number of jobs paying at (and above) the new minimum wage. Our estimates imply that the higher minimum wage had at most a small negative eect on employment, and so the main eect was pushing up wages. We then use data on a large panel of firms to evaluate the economic incidence of the minimum wage increase. Contrary to theoretical models that attribute the small employment eects of minimum wage changes to monopsonistic wage setting, we find no evidence that the rise in the minimum wage led to lower profitability among low-wage employers. Instead, we find that the costs of the minimum wage were largely passed through to consumers.