Minimum Wages and Firm Profitability

Mirko Draca, Stephen Machin () and John van Reenen ()

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Although there is a large literature on the economic effects of minimum wages on labour marketoutcomes (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 limitedimpact on jobs, so it is natural to imagine there must be a stronger impact on other aspects of firmbehaviour. In this paper we consider the impact of minimum wages on firm profitability by exploitingthe introduction of a minimum wage to the UK labour market in 1999. We use pre-policy informationon the distribution of wages to construct treatment and comparison groups and implement a differencein differences approach. We show evidence that firm profitability was significantly reduced (andwages significantly raised) by the minimum wage introduction. This emerges from separate analysesof two distinct types of firm level panel data (one on firms in a very low wage sector, UK residentialcare homes, and a second on firms across all sectors). Interestingly, we find no evidence that theprofitability reductions resulted in increases in firm exit, so our findings may be consistent withredistribution of quasi-rents towards low wage employees.

Keywords: Minimum Wage; Profitability; Exit (search for similar items in EconPapers)
JEL-codes: J23 L25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab
Date: Written
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Related works:
Working Paper: Minimum Wages and Firm Profitability (2006)
Working Paper: Minimum Wages and Firm Profitability (2008)
Working Paper: Minimum Wages and Firm Profitability (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0715

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