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Minimum Wages and Firm Profitability

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Author Info
Mirko Draca
Stephen Machin
John Van Reenen

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Abstract

Although there is a large literature on the economic effects of minimum wages on labour market outcomes (especially employment), there is much less evidence on their impact on firm performance. In this paper we consider a very under-studied area - the impact of minimum wages on firm profitability. The analysis exploits the changes induced by the introduction of a national minimum wage to the UK labour market in 1999, using pre-policy information on the distribution of wages to construct treatment and comparison groups and implement a difference in differences approach. We report evidence showing 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). We find that net entry rates have fallen, but that the changes in exit and entry rates are statistically insignificant.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13996.

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Date of creation: May 2008
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Handle: RePEc:nbr:nberwo:13996

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Find related papers by JEL classification:
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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  1. Brown, Charles & Gilroy, Curtis & Kohen, Andrew, 1982. "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 487-528, June. [Downloadable!] (restricted)
  2. Mark B. Stewart, 2004. "The Impact of the Introduction of the U.K. Minimum Wage on the Employment Probabilities of Low-Wage Workers," Journal of the European Economic Association, MIT Press, vol. 2(1), pages 67-97, 03. [Downloadable!] (restricted)
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  3. repec:fth:prinin:300 is not listed on IDEAS
  4. Daniel Aaronson, 2001. "Price Pass-Through And The Minimum Wage," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 158-169, February. [Downloadable!] (restricted)
  5. Metcalf, David, 2002. " The National Minimum Wage: Coverage, Impact and Future," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(0), pages 567-82, Supplemen. [Downloadable!] (restricted)
  6. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," Working Papers 680, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  7. Richard Dickens & Alan Manning, 2002. "Has The National Minimum Wage Reduced UK Wage Inequality?," CEP Discussion Papers 0533, Centre for Economic Performance, LSE. [Downloadable!]
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  8. S Machin & A Manning, 1992. "Minimum Wages," CEP Discussion Papers 080, Centre for Economic Performance, LSE.
  9. Stephen R. Bond & Jason G. Cummins, 2000. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2000-1), pages 61-124. [Downloadable!]
  10. David Card, 1992. "Using regional variation in wages to measure the effects of the federal minimum wage," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 46(1), pages 22-37, October.
  11. Stephen Machin & Joan Wilson, 2004. "Minimum wages in a low-wage labour market: Care homes in the UK," Economic Journal, Royal Economic Society, vol. 114(494), pages C102-C109, 03. [Downloadable!] (restricted)
  12. Sara Lemos, 2006. "A Survey of the Effects of the Minimum Wage on Prices," Discussion Papers in Economics 06/9, Department of Economics, University of Leicester. [Downloadable!]
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  13. Van Reenen, John, 1994. "The Creation and Capture of Rents: Wages and Innovation in a Panel of UK Companies," CEPR Discussion Papers 1071, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Timothy Besley & Robin Burgess, 2002. "Can Labour Regulation Hinder Economic Performance? Evidence from India," STICERD - Development Economics Papers 33, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
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  15. Ashenfelter, Orley & Smith, Robert S, 1979. "Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 333-50, April. [Downloadable!] (restricted)
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  16. Machin, Stephen & Van Reenen, John, 1993. "Profit Margins and the Business Cycle: Evidence from UK Manufacturing Firms," Journal of Industrial Economics, Blackwell Publishing, vol. 41(1), pages 29-50, March. [Downloadable!] (restricted)
  17. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," NBER Working Papers 4058, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Richard Blundell & Monica Costa Dias & Costas Meghir & John Van Reenen, 2001. "Evaluating the employment impact of a mandatory job search assistance program," IFS Working Papers W01/20, Institute for Fiscal Studies. [Downloadable!]
  19. David Metcalf, 2002. "The National Minimum Wage: Coverage, Impact and Future," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(s1), pages 567-582, 08. [Downloadable!] (restricted)
  20. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, vol. 84(4), pages 772-93, September. [Downloadable!] (restricted)
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  21. S.J Nickell & D Nicolitsas, 1994. "Wages," CEP Discussion Papers 0219, Centre for Economic Performance, LSE. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alison Booth & Mark L. Bryan, 2006. "Training, Minimum Wages and the Earnings Distribution," CEPR Discussion Papers 537, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University. [Downloadable!]
  2. Mirco Tonin, 2007. "Minimum Wage and Tax Evasion: Theory and Evidence," IEHAS Discussion Papers 0701, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
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