Minimum Wage Price Effects on Sectoral Level: Case For Russia

The minimum wage (MW) appears to be one of the main instruments for overcoming poverty, designed to improve the life quality of low-income workers and reduce the income differentiation. However, the practice of developed countries shows that the minimum wage implication may result in a number of negative, adverse effects, which only worsen the living standards of those categories of workers who are targeted by this institution. The mechanism of these effects’ realization is that the increase of the minimum wage has a huge burden on the payroll of enterprises, which, in turn, have several compensation schemes to deal with arising costs. This paper tests the hypothesis that the costs are passed on to the product prices. Analysis of the minimum wage application in Russia and the assessment of its impact on the major determinants of the labor market are particularly relevant nowadays due to active reforms in this area in the second half of the 2000s and several sharp increases of the federal minimum wage. While Russian scientists pay a lot of attention to the minimum wage effect on employment and wage distribution, there have not yet been done the evaluation of the impact of the minimum wage on prices. This study fills in this gap and answers the question of how the changes in the minimum wage rates affect prices at the industry level. As far as the method of assessment is concerned, regression analysis of panel data is applied based on the empirical model provided by S. Lemos (2006). Specifications are conducted separately for significant increases in the minimum wage rates at the federal level in September 2007 and January 2009 on the base of the manufacturing industry as a sector with a high proportion of low-paid workers. The results confirm that the increase in the minimum wage has a positive effect on prices, which is consistent with findings of similar studies for other countries.