How firms respond to minimum wage increases: Evidence from North Macedonia

We study the effects of North Macedonia’s 2017 minimum wage reform – the largest in the country’s history – using matched employer-employee administrative data covering the entire range of firms and employees, and a difference-in-differences design based on firms’ pre-reform share of minimum wage workers. We examine changes in firm employment, wage levels, profitability, non-wage operating expenditures and productivity after the reform. Five results emerge. (i) We find no evidence of job losses, with employment increasing overall, and smaller increases for firms that were more sensitive to the minimum wage increase. (ii) Wages higher than the minimum increased on a widespread basis, with no difference between firms attributable to their relative exposure to the minimum wage increase. (iii) Profitability remained broadly unchanged, with no differences related to the minimum wage. (iv) Firms that were more sensitive to the minimum wage increase reduced non-wage operating costs to a greater extent. (v) Productivity rose, on average, with larger gains among more exposed firms. Overall, the evidence suggests that firms accommodated the higher minimum wage primarily through cuts in other operating expenses and productivity improvements, rather than through layoffs or profit compression, consistent with non-fully competitive wage-setting in a low labour-share economy. These results can serve as a useful benchmark for designing future minimum wage increases in economies with similar features.