Firm-Level Employment Dynamics and Minimum Wages: Evidence from Spain

This paper estimates the effects of a sharp rise in the Spanish minimum wage on firm-level employment and worker flows. Our analysis uses a novel dataset of linked employer-employee data and exploits the variation in the share of workers of each establishment who were directly affected by the increase in the minimum wage using a difference-in-differences design. We find that the 22% minimum wage hike caused an increase in wage growth of approximately 11 percentage points and a reduction in employment growth of around 5 percentage points at establishments where all workers were affected relative to firms where no workers were affected, resulting in an own-wage elasticity of -0.39. The negative effects on employment are concentrated in small establishments with up to five employees, but we show that the minimum wage had much broader implications as it caused a simultaneous increase in inflows and worker outflows for affected establishments with up to 250 employees. The resulting increase in gross flows almost doubles the net effects on employment leading to a deterioration of job quality. We link these novel findings to the dual structure of the Spanish labor market.