How Do Changes in the Minimum Wage Affect Household Consumption?

Abstract

Minimum wage hikes increase the consumption of affected households. This paper studies the structure of the additional consumption across various low-income household types. Using a unique set of cross-sectional data at the household level in the Czech Republic, I simulate the impact on consumption categories of additions to disposable income due to minimum wage increases between 2011 and 2019. My findings suggest that the additional income is predominantly allocated to essentials, despite a drop in their budget share. Consumption of addictive goods represents a luxury for low-income households, among whom the demand is even more elastic for those with children. Similarly, health and education expenditures are substantially income sensitive for households with children.