INDUSTRY DYNAMICS AND THE MINIMUM WAGE: A PUTTY†CLAY APPROACH

Daniel Aaronson, Eric French, Isaac Sorkin and Ted To

International Economic Review, 2018, vol. 59, issue 1, 51-84

Abstract: We document two new findings about the industry†level response to minimum wage hikes. First, restaurant exit and entry both rise following a hike. Second, there is no change in employment among continuing restaurants. We develop a model of industry dynamics based on putty†clay technology that is consistent with these findings. In the model, continuing restaurants cannot change employment, and thus industry†level adjustment occurs gradually through exit of labor†intensive restaurants and entry of capital†intensive restaurants. Interestingly, the putty†clay model matches the small estimated short†run disemployment effect of the minimum wage found in other studies, but produces a larger long†run disemployment effect.

Date: 2018
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