Minimum Wages and Firm Profitability

Mirko Draca, Stephen Machin and John van Reenen

No 1913, IZA Discussion Papers from Institute of Labor Economics (IZA)

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

Keywords: profitability; exit; minimum wage (search for similar items in EconPapers)
JEL-codes: J23 L25 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2006-01
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published - published in: American Economic Journal: Applied Economics, 2011, 3 (1), 121-159

Downloads: (external link)
https://docs.iza.org/dp1913.pdf (application/pdf)

Related works:
Journal Article: Minimum Wages and Firm Profitability (2011)
Working Paper: Minimum Wages and Firm Profitability (2008)
Working Paper: Minimum Wages and Firm Profitability (2006)
Working Paper: Minimum Wages and Firm Profitability (2006)
Working Paper: Minimum wages and firm profitability (2006)
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:iza:izadps:dp1913

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().