Minimum Wage, Business Dynamism, and the Life Cycle of Firms

André Victor Doherty Luduvice, Tomas Martinez and Alexandre Sollaci

No 13444, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: This paper studies the effects of the minimum wage on the life cycle of firms. We first build a tractable model where heterogeneous firms have labor market power, invest in innovation, and choose formal or informal sectors. The model predicts that a minimum wage hike not only shrinks young and low-productivity firms but also lowers incentives to innovate, resulting in lower life cycle growth. We then test the predictions of the model using Brazilian administrative and census data leveraging the variation in exposure across establishments and municipalities to the large increase in the minimum wage between 1999 and 2010. At the establishment level, an increase in the minimum wage: i) decreases the growth rates of small and young establishments and ii) increases the growth rates of old and large establishments. When analyzing exposed municipalities, we observe an increase in the earnings of workers in both the formal and informal sectors, as well as informal employment. Our findings suggest that the minimum wage is a possible explanation for the decline in the importance of young establishments and business dynamism in Brazil.

Keywords: Monopsony; Business Dynamism; Firm Heterogeneity; Minimum Wage; Informality (search for similar items in EconPapers)
JEL-codes: E24 E26 J38 J42 L25 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-dge, nep-ent and nep-iue
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://publications.iadb.org/publications/english ... e-Cycle-of-Firms.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:13444

DOI: 10.18235/0012849

Access Statistics for this paper

More papers in IDB Publications (Working Papers) from Inter-American Development Bank Contact information at EDIRC.
Bibliographic data for series maintained by Felipe Herrera Library ().