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Minimum Wage and Productivity: Evidence from Chilean Manufacturing Plants

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  • Roberto Álvarez
  • Rodrigo Fuentes

Abstract

This paper analyzes the effects of the minimum wage on a firm's productivity. The main hypothesis is that an increase in the minimum wage has a negative effect on total factor productivity (TFP) due to the existence of labor adjustment costs. Using data from Chilean manufacturing plants for the period 1992-2005 and a difference-in-differences methodology, we find that an increase in minimum wage had a negative effect on TFP. Our estimates indicate that a real increase of about 22% in the minimum wage during the period 1998-2000 reduced TFP by 5.8% in low unskilled-intensive industries and 9.7% in high unskilled-intensive industries. These results are robust to alternative measures of productivity and to the inclusion of several covariates to avoid confounding effects of other policy changes or firms' exposure to minimum wage changes.

Suggested Citation

  • Roberto Álvarez & Rodrigo Fuentes, 2018. "Minimum Wage and Productivity: Evidence from Chilean Manufacturing Plants," Economic Development and Cultural Change, University of Chicago Press, vol. 67(1), pages 193-224.
    • Handle: RePEc:ucp:ecdecc:doi:10.1086/697557
    DOI: 10.1086/697557
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    Cited by:

    1. Cho, Sungtaek & Kwak, Do Won & Lee, Hongshik, 2020. "Participation in the Kaesong Industrial Complex and its impact on productivity: South Korean textile firms’ experiences," Japan and the World Economy, Elsevier, vol. 53(C).
    2. Zheng Li & Fengshuo Liu & Shuai Mi, 2022. "Can an increase in the minimum wage standard force enterprises to innovate? Evidence from China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(8), pages 3807-3819, December.
    3. Partha Pratim Dube, 2021. "Some Comments on TFP and its Growth in India," Bulgarian Economic Papers bep-2021-05, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski, revised Jul 2021.
    4. Wei, Zhihua & Ren, Zerong & Zhu, Caiyun & Zhou, Yisihong & Liu, Xiaowen, 2023. "Minimum wage effects on firms’ R&D investment: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 287-305.
    5. Chung-Khain Wye & Elya Nabila Abdul Bahri, 2021. "How does employment respond to minimum wage adjustment in China?," The Economic and Labour Relations Review, , vol. 32(1), pages 90-114, March.

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