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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 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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Publication status: published as Mirko Draca & Stephen Machin & John Van Reenen, 2011. "Minimum Wages and Firm Profitability," American Economic Journal: Applied Economics, American Economic Association, vol. 3(1), pages 129-51, January.
Handle: RePEc:nbr:nberwo:13996

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Cited by:
  1. Ossi Korkeamäki, 2011. "The Finnish payroll tax cut experiment revisited," Working Papers 22, Government Institute for Economic Research Finland (VATT).
  2. Raffaella Sadun, 2008. "Does Planning Regulation Protect Independent Retailers?," CEP Discussion Papers dp0888, Centre for Economic Performance, LSE.
  3. Ossi Korkeamäki, 2011. "The Finnish payroll tax cut experiment revisited, or where did the money go?," ERSA conference papers ersa11p898, European Regional Science Association.
  4. 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).
  5. Mirco Tonin, 2009. "Minimumwage and tax evasion: theory and evidence," MNB Working Papers, Magyar Nemzeti Bank (the central bank of Hungary) 2009/2, Magyar Nemzeti Bank (the central bank of Hungary).
  6. 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.
  7. 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).
  8. Hirsch, Barry & Kaufman, Bruce E. & Zelenska, Tetyana, 2011. "Minimum Wage Channels of Adjustment," IZA Discussion Papers 6132, Institute for the Study of Labor (IZA).
  9. 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.
  10. 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.
  11. Dan Corry & Anna Valero & John Van Reenen, 2011. "UK Economic Performance Since 1997: Growth, Productivity and Jobs," CEP Special Papers 24, Centre for Economic Performance, LSE.

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