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Do Firms Exit the Formal Economy after a Minimum Wage Hike ?

Author

Listed:
  • Bossavie,Laurent Loic Yves
  • Acar,Aysenur
  • Makovec,Mattia

Abstract

This paper explores the effects of a large minimum wage hike on firm exits from the formal economy, and its associated impacts on employment and informality. It uses an exceptionally rich linked employer-employee dataset on the universe of formal firms and workers in a developing economy. Data on the full wage distribution in firms allows to precisely measure minimum wage exposure, and to estimate the causal effect of the hike in a difference-in-difference setting. The hike is found to significantly increase the destruction rate of formal firms. Effects are concentrated among small and low-productivity firms while exits of high-productivity firms are unaffected. The increase in firm exits is larger in industries with small profit margins, higher labor shares and stronger market competition. We also evidence negative effects on formal employment, which mainly originate from firm destruction rather than employment cuts in surviving firms. Corroborative evidence indicates that workers from exiting firms mostly transition into informal employment, instead of being jobless after the hike.

Suggested Citation

  • Bossavie,Laurent Loic Yves & Acar,Aysenur & Makovec,Mattia, 2019. "Do Firms Exit the Formal Economy after a Minimum Wage Hike ?," Policy Research Working Paper Series 8749, The World Bank.
    • Handle: RePEc:wbk:wbrwps:8749
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    Citations

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    Cited by:

    1. Akgündüz, Yusuf Emre & Bağır, Yusuf Kenan & Cılasun, Seyit Mümin & Kırdar, Murat Güray, 2023. "Consequences of a massive refugee influx on firm performance and market structure," Journal of Development Economics, Elsevier, vol. 162(C).
    2. Bíró, Anikó & Prinz, Dániel & Sándor, László, 2022. "The minimum wage, informal pay, and tax enforcement," Journal of Public Economics, Elsevier, vol. 215(C).
    3. Yuci Chen, 2019. "What Do Establishments Do When Wages Increase? Evidence from Minimum Wages in the United States," Working Papers 19-31, Center for Economic Studies, U.S. Census Bureau.
    4. Işık Enes & Orhangazi Özgür & Tekgüç Hasan, 2020. "Heterogeneous effects of minimum wage on labor market outcomes: A case study from Turkey," IZA Journal of Labor Policy, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 10(1), pages 1-41, March.
    5. Hernán Vallejo, 2021. "Employment Differentiation, Minimum Wages and Firm Exit," Documentos CEDE 19141, Universidad de los Andes, Facultad de Economía, CEDE.

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