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Minimum Wages and Firm Profitability

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  • Mirko Draca
  • Stephen Machin
  • John Van Reenen

Abstract

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.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0715.

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Date of creation: Feb 2006
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Handle: RePEc:cep:cepdps:dp0715

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Keywords: Minimum Wage; Profitability; Exit;

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Citations

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Cited by:
  1. Mirco Tonin, 2007. "Minimum Wage and Tax Evasion: Theory and Evidence," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 0701, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  2. Ossi Korkeamäki, 2011. "The Finnish payroll tax cut experiment revisited," Working Papers 22, Government Institute for Economic Research Finland (VATT).
  3. Hirsch, Barry & Kaufman, Bruce E. & Zelenska, Tetyana, 2011. "Minimum Wage Channels of Adjustment," IZA Discussion Papers 6132, Institute for the Study of Labor (IZA).
  4. John Schmitt, 2013. "Why Does the Minimum Wage Have No Discernible Effect on Employment?," CEPR Reports and Issue Briefs, Center for Economic and Policy Research (CEPR) 2013-04, Center for Economic and Policy Research (CEPR).
  5. Raffaella Sadun, 2008. "Does planning regulation protect independent retailers?," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 28503, London School of Economics and Political Science, LSE Library.
  6. Dan Corry & Anna Valero & John Van Reenen, 2011. "UK economic performance since 1997: growth, productivity and jobs," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 47521, London School of Economics and Political Science, LSE Library.
  7. Franz Müntefering & Hermann Otto Solms & Heike Maria Kunstmann & Wilhelm Adamy & Joachim Möller & Peter Hampe & Ulrich Walwei & Michael Knogler & Wolfgang Quaisser & Wolfgang Ochel & Henry Werner, 2006. "Arbeitslosigkeit ohne Ende? Die Arbeitsmarkt- und Beschäftigungspolitik der neuen Bundesregierung in der Kontroverse," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 59(07), pages 03-43, 04.
  8. Skedinger, Per, 2014. "Effects of Payroll Tax Cuts for Young Workers," Working Paper Series, Research Institute of Industrial Economics 1031, Research Institute of Industrial Economics.
  9. Lin, Carl, 2012. "Less Myth, More Measurement: Decomposing Excess Returns from the 1989 Minimum Wage Hike," IZA Discussion Papers 6269, Institute for the Study of Labor (IZA).
  10. Ossi Korkeamäki, 2011. "The Finnish payroll tax cut experiment revisited, or where did the money go?," ERSA conference papers ersa11p898, European Regional Science Association.
  11. Tonin, Mirco, 2007. "Minimum wage and tax evasion: theory," Discussion Paper Series In Economics And Econometrics 0711, Economics Division, School of Social Sciences, University of Southampton.

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