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

Laurent Bossavie, Aysenur Acar and Mattia Makovec

No 8749, Policy Research Working Paper Series from The World Bank

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.

Keywords: Labor Standards; Rural Labor Markets; Inequality; Public Sector Administrative and Civil Service Reform; Administrative&Civil Service Reform; Public Sector Administrative&Civil Service Reform; De Facto Governments; Democratic Government; Employment and Unemployment; Labor Markets (search for similar items in EconPapers)
Date: 2019-02-15
New Economics Papers: this item is included in nep-ent and nep-iue
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Citations: View citations in EconPapers (6)

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