Firms' Risk Adjustments to Minimum Wage: Financial Leverage and Labor Share Trade-off

Ying Liang

Papers from arXiv.org

Abstract: This paper evaluates the impact of the German minimum wage policy on firms' financial leverage. By using a comprehensive firm-establishment-employee linked dataset and a difference-in-differences estimation with firm-level variation in treatment intensity, the analysis shows that the average minimum wage level reduces firms' financial leverage by about 0.5 to 0.9 percentage points, corresponding to 1 to 2 percent of the mean of financial leverage. Further investigation of the mechanism shows that the minimum wage does not lead to significant capital-labor substitution; therefore, the labor share increases. Firms react to the increased labor share by deleveraging. The results suggest that while the minimum wage benefits workers by allocating more earnings to the labor force, it also introduces greater operating risks and encourages conservative financial behavior among firms.

Date: 2024-08
New Economics Papers: this item is included in nep-lma
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