Minimum Wage Pass-through to Wholesale and Retail Prices: Evidence from the Washington State Cannabis Industry

Title: Minimum Wage Pass-through to Wholesale and Retail Prices: Evidence from the Washington State Cannabis Industry

Abstract: A growing empirical literature finds that firms pass the cost of minimum wage hikes onto consumers via retail prices. Yet, little is known about minimum wage effects on wholesale prices and whether retailers face a wholesale cost shock in addition to the labor cost shock. I exploit the unique market structure of Washington state's legal recreational cannabis industry to investigate minimum wage pass-through to wholesale and retail prices. I use scanner data on tens of millions of transactions across the supply chain and leverage geographic variation in firms' minimum wage exposure across six minimum wage hikes between 2018 and 2021. When ignoring wholesale cost effects, I find retail pass-through rates consistent with existing literature---yet retail pass-through rates double once wholesale cost effects are accounted for. Retail markups do not adjust to wholesale pass-through, indicating a full transmission of wholesale cost shocks to retail prices. The results suggest that previous research may underestimate the impact of minimum wage increases on retail prices. This paper highlights the importance of analyzing the entire supply chain when evaluating the product market effects of minimum wage hikes.