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Minimum wages strike back: the effects on capital and labor demands in a large-firm framework

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  • Sofia Bauducco
  • Alexandre Janiak

Abstract

We study the effect of a binding minimum wage on labor market outcomes, the accumulation of capital and welfare. We consider a large firm that invests in physical capital and hires several types of workers. Labor markets are characterized by search and matching frictions, while incomplete wage contracts allow workers to expropriate part of the return on each factor. Absent a minimum wage, the model generates levels of capital and employment that are inefficiently too low or too high. We show that the introduction of a binding minimum wage has ambiguous effects on employment, capital and welfare, and depends on the ability of the minimum wage to deter rent appropriation by workers. Our model is able to generate situations where i) a minimum wage increases the level of employment through an increase in labor demand, or has a small impact on employment, at the same time as ii) it increases the aggregate stock of capital. The first outcome is in line with the empirical literature and holds even in partial equilibrium. The second result offers an explanation for the higher capital-to-output ratios observed in Continental Europe as compared to the US.

Suggested Citation

  • Sofia Bauducco & Alexandre Janiak, 2012. "Minimum wages strike back: the effects on capital and labor demands in a large-firm framework," Documentos de Trabajo 287, Centro de Economía Aplicada, Universidad de Chile.
    • Handle: RePEc:edj:ceauch:287
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    References listed on IDEAS

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    1. Francisco Henríquez & Alejandra Mizala & Andrea Repetto, 2009. "Effective Schools for Low Income Children: a Study of Chile’s Sociedad de Instrucción Primaria," Documentos de Trabajo 258, Centro de Economía Aplicada, Universidad de Chile.
    2. Alejandra Mizala & Pilar Romaguera & Sebastian Gallegos, 2010. "Public-Private Wage Gap In Latin America (1999-2007): A Matching Approach," Documentos de Trabajo 268, Centro de Economía Aplicada, Universidad de Chile.
    3. Bernardo Lara & Alejandra Mizala & Andrea Repetto, 2009. "The Effectiveness of Private Voucher Education: Evidence from Structural School Switches," Documentos de Trabajo 263, Centro de Economía Aplicada, Universidad de Chile.
    4. Eduardo Engel & Ronald Fischer & Alexander Galetovic & Manuel Hermosilla, 2009. "Renegociación de concesiones en Chile," Documentos de Trabajo 262, Centro de Economía Aplicada, Universidad de Chile.
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    Cited by:

    1. Fischer, Ronald & Valenzuela, Patricio, 2013. "Financial openness, market structure and private credit: An empirical investigation," Economics Letters, Elsevier, vol. 121(3), pages 478-481.
    2. Andreasen, Eugenia & Valenzuela, Patricio, 2016. "Financial openness, domestic financial development and credit ratings," Finance Research Letters, Elsevier, vol. 16(C), pages 11-18.
    3. Nguyen, Cuong, 2012. "Do Minimum Wages Affect Firms’ Labor and Capital? Evidence from Vietnam," MPRA Paper 48656, University Library of Munich, Germany.
    4. Cuong Viet Nguyen, 2017. "Do minimum wages affect firms’ labor and capital? Evidence from Vietnam," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 22(2), pages 291-308, April.
    5. Diego Huerta & Ronald Fischer & Patricio Valenzuela, 2015. "Inequality and Private Credit," Documentos de Trabajo 316, Centro de Economía Aplicada, Universidad de Chile.

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