Minimum Wage Increase and Firm Profitability: Evidence from Poland

Mykola Babiak () and Olena Chorna ()
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Mykola Babiak: CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences, Politickych veznu 7, 111 21 Prague, Czech Republic
Olena Chorna: Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 11000, Prague 1, Czech Republic

No 2019/14, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: In this paper, we investigate how the increase in minimum wages affect firm profitability. We focus on the firm-level panel data in Poland, where minimum wage growth remained stable and averaged around 4 percent between 2003 and 2007 butaccelerated to 20 percent in 2008. Implementing a difference-in-difference approach in this quasi-experimental setting, we find that the minimum wage increase contributed positively to average wages and negatively to firm profitability. Intuitively, the increased labor costs due to a higher wage floor directly reduce profits in the absence of labor demand adjustments. We formally test and confirm validity of theseempirical predictions in a simple theoretical model of a profit maximizing firm.

Keywords: Minimum wage; firm profitability; difference-in-difference (search for similar items in EconPapers)
JEL-codes: C21 J23 L25 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2019-06, Revised 2019-06
New Economics Papers: this item is included in nep-bec, nep-eff, nep-ore and nep-tra
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