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Minimum Wages and Firm Profitability

  • Draca, Mirko

    ()

    (London School of Economics)

  • Machin, Stephen

    ()

    (University College London)

  • Van Reenen, John

    ()

    (CEP, London School of Economics)

Although there is a large literature on the economic effects of minimum wages on labour market outcomes (especially employment), there is hardly any evidence on their impact on firm performance. This is surprising: minimum wages appear to have a significant impact on wages, but only a limited impact on jobs, so it is natural to imagine there must be a stronger impact on other aspects of firm behaviour. In this paper we consider the impact of minimum wages on firm profitability by exploiting the introduction of a minimum wage to the UK labour market in 1999. We use pre-policy information on the distribution of wages to construct treatment and comparison groups and implement a difference in differences approach. We show evidence 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). Interestingly, we find no evidence that the profitability reductions resulted in increases in firm exit, so our findings may be consistent with redistribution of quasi-rents towards low wage employees.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1913.

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Length: 50 pages
Date of creation: Jan 2006
Date of revision:
Publication status: published in: American Economic Journal: Applied Economics, 2011, 3 (1), 121-159
Handle: RePEc:iza:izadps:dp1913
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  1. 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.
  2. Eric French & Dan Aaronson, 2004. "Product Market Evidence on the Employment Effects of the Minimum Wage," Econometric Society 2004 North American Summer Meetings 549, Econometric Society.
  3. Nick Bloom & Stephen Dorgan & John Dowdy & Tom Rippin & John Van Reenen, 2005. "Management Practices Across Firms and Nations," CEP Special Papers 17, Centre for Economic Performance, LSE.
  4. Stephen Machin & Alan Manning, 2004. "A test of competitive labor market theory: The wage structure among care assistants in the South of England," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 57(3), pages 371-385, April.
  5. Denis FOUGERE & Erwan GAUTIER & Hervé LE BIHAN, 2009. "Restaurant Prices and the Minimum Wage," Working Papers 2009-13, Centre de Recherche en Economie et Statistique.
  6. Stewart, Mark B., 2002. "The Impact Of The Introduction Of The Uk Minimum Wage On The Employment Probabilities Of Low Wage Workers," The Warwick Economics Research Paper Series (TWERPS) 630, University of Warwick, Department of Economics.
  7. Richard Blundell & Monica Costa Dias & Costas Meghir & John Van Reenen, 2004. "Evaluating the Employment Impact of a Mandatory Job Search Program," Journal of the European Economic Association, MIT Press, vol. 2(4), pages 569-606, 06.
  8. David Card & Alan Krueger, 1993. "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania," Working Papers 694, Princeton University, Department of Economics, Industrial Relations Section..
  9. David Card, 1992. "Using regional variation in wages to measure the effects of the federal minimum wage," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 22-37, October.
  10. David Neumark & Olena Nizalova, 2006. "Minimum Wage Effects in the Longer Run," Working Papers 050626, University of California-Irvine, Department of Economics.
  11. 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.
  12. Sara Lemos, 2008. "A Survey Of The Effects Of The Minimum Wage On Prices," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 187-212, 02.
  13. Nick Bloom & John Van Reenen, 2006. "Measuring and Explaining Management Practices Across Firms and Countries," NBER Working Papers 12216, National Bureau of Economic Research, Inc.
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  15. 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.
  16. 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.
  17. Richard Dickens & Alan Manning, 2002. "Has The National Minimum Wage Reduced UK Wage Inequality?," CEP Discussion Papers dp0533, Centre for Economic Performance, LSE.
  18. Menezes-Filho, Naercio Aquino, 1997. "Unions and Profitability over the 1980s: Some Evidence on Union-Firm Bargaining in the United Kingdom," Economic Journal, Royal Economic Society, vol. 107(442), pages 651-70, May.
  19. Stephen Nickell & D. Nicolitsas, 1994. "Wages," LSE Research Online Documents on Economics 51644, London School of Economics and Political Science, LSE Library.
  20. Thomas Lemieux, 2006. "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?," American Economic Review, American Economic Association, vol. 96(3), pages 461-498, June.
  21. 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(1), pages 61-124.
  22. Stewart, Mark B, 2002. " Estimating the Impact of the Minimum Wage Using Geographical Wage Variation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(0), pages 583-605, Supplemen.
  23. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and innovation: an inverted U relationship," IFS Working Papers W02/04, Institute for Fiscal Studies.
  24. Heckman, James J & Ichimura, Hidehiko & Todd, Petra E, 1997. "Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Wiley Blackwell, vol. 64(4), pages 605-54, October.
  25. Stephen Machin & Alan Manning & Lupin Rahman, 2002. "Where the minimum wage bites hard: the introduction of the UK national minimum wage to a low wage sector," LSE Research Online Documents on Economics 20070, London School of Economics and Political Science, LSE Library.
  26. Machin, Stephen & Alan Manning & Lupin Rahman, 2003. "Where Minimum Wage Bites Hard: The Introduction of the UK National Minimum Wage to a Low Wage Sector," Royal Economic Society Annual Conference 2003 145, Royal Economic Society.
  27. Slade, Margaret E., 2004. "Competing models of firm profitability," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 289-308, March.
  28. 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.
  29. Machin, Stephen & Van Reenen, John, 1993. "Profit Margins and the Business Cycle: Evidence from UK Manufacturing Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 41(1), pages 29-50, March.
  30. Stephen Machin & Alan Manning & Lupin Rahman, 2003. "Where the Minimum Wage Bites Hard: Introduction of Minimum Wages to a Low Wage Sector," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 154-180, 03.
  31. Orley Ashenfelter & Robert Smith, 1977. "Compliance with the Minimum Wage Law," Working Papers 478, Princeton University, Department of Economics, Industrial Relations Section..
  32. 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.
  33. 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.
  34. Dickens, Richard & Machin, Stephen & Manning, Alan, 1999. "The Effects of Minimum Wages on Employment: Theory and Evidence from Britain," Journal of Labor Economics, University of Chicago Press, vol. 17(1), pages 1-22, January.
  35. Brown, Charles, 1999. "Minimum wages, employment, and the distribution of income," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 32, pages 2101-2163 Elsevier.
  36. Stephen Machin & Alan Manning, 1992. "Minimum Wages," CEP Discussion Papers dp0080, Centre for Economic Performance, LSE.
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