Minimum Wages and Firm Profitability

By M. Draca, Stephen Machin, John Van Reenen. Social Science Research Network, 2006

330 citations recorded by the source corpus.

Although there is a large literature on the economic effects of minimum wages on labour market outcomes (especially employment), there is hardly any evidence on their impact on firm performance. This is surprising: minimum wages appear to have a significant impact on wages, but only a limited impact on jobs, so it is natural to imagine there must be a stronger impact on other aspects of firm behaviour. In this paper we consider the impact of minimum wages on firm profitability by exploiting the introduction of a minimum wage to the UK labour market in 1999. We use pre-policy information on the distribution of wages to construct treatment and comparison groups and implement a difference in differences approach. We show evidence that firm profitability was significantly reduced (and wages significantly raised) by the minimum wage introduction. This emerges from separate analyses of two distinct types of firm level panel data (one on firms in a very low wage sector, UK residential care homes, and a second on firms across all sectors). Interestingly, we find no evidence that the profitability reductions resulted in increases in firm exit, so our findings may be consistent with redistribution of quasi-rents towards low wage employees.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/1308f9826aeb35f9fad46805f3ec71b84a0a60a9

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Citations in the corpus

Improving or disappearing: Firm-level adjustments to minimum wages in China (2018, background): “Under perfect competition, price equals marginal cost: additional labor costs such as those from minimum-wage rises should then be passed on to consumers in the form of higher prices (Draca et al., 2011).”
The Spending and Debt Response to Minimum Wage Hikes (2012, neutral): “Appendix B: Certainty and no borrowing constraints (not for publication) Using assets instead of cash on hand as the state variable, Bellman’s equation (18) without uncertainty is:”
Raising the standard: Minimum wages and firm productivity (2017, methodology): “FAME company data has previously been used by Draca et al. (2005, 2011) to study the impacts of the NMW on firm profitability (and other outcomes; in the 2011 version), using data to 2002; and by Rizov and Croucher (2011) to estimate the impact of the NMW on sectoral productivity for firms in differ”
Earnings Inequality and the Minimum Wage: Evidence from Brazil (2017, background): “Harasztosi and Lindner (2015) study an increase in the minimum wage in Hungary in 2001 that is of similar size as the one experienced in Brazil 1996–2012, and find that it pushed up wages with only a small negative impact on employment.”
How Effective Is the Minimum Wage at Supporting the Poor? (2015, background): “Katz and Krueger ð1992Þ, Machin, Manning, and Rahman ð2003Þ, and Draca, Machin, and Van Reenen ð2011Þ do not obtain statistically significant impacts.”