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Minimum Wages and Firm Profitability

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  • Draca, Mirko

    ()
    (London School of Economics)

  • Machin, Stephen

    ()
    (University College London)

  • Van Reenen, John

    ()
    (CEP, London School of Economics)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1913.

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Length: 50 pages
Date of creation: Jan 2006
Date of revision:
Publication status: published in: American Economic Journal: Applied Economics, 2011, 3 (1), 121-159
Handle: RePEc:iza:izadps:dp1913

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Keywords: profitability; exit; minimum wage;

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References

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Citations

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Cited by:
  1. Dan Corry & Anna Valero & John Van Reenen, 2011. "UK Economic Performance Since 1997: Growth, Productivity and Jobs," CEP Special Papers, Centre for Economic Performance, LSE 24, Centre for Economic Performance, LSE.
  2. Raffaella Sadun, 2008. "Does Planning Regulation Protect Independent Retailers?," CEP Discussion Papers, Centre for Economic Performance, LSE dp0888, Centre for Economic Performance, LSE.
  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. Tonin, Mirco, 2007. "Minimum wage and tax evasion: theory," Discussion Paper Series In Economics And Econometrics, Economics Division, School of Social Sciences, University of Southampton 0711, Economics Division, School of Social Sciences, University of Southampton.
  5. 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).
  6. 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).
  7. Mirco Tonin, 2007. "Minimum Wage and Tax Evasion: Theory and Evidence," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan wp865, William Davidson Institute at the University of Michigan.
  8. Ossi Korkeamäki, 2011. "The Finnish payroll tax cut experiment revisited, or where did the money go?," ERSA conference papers ersa11p898, European Regional Science Association.
  9. 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.
  10. Ossi Korkeamäki, 2011. "The Finnish payroll tax cut experiment revisited," Working Papers, Government Institute for Economic Research Finland (VATT) 22, Government Institute for Economic Research Finland (VATT).
  11. 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.

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