Minimum Wages and Firm Profitability

70 Pages Posted: 16 May 2008 Last revised: 14 Apr 2013

See all articles by Mirko Draca

Mirko Draca

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP); Harvard University - Edmond J. Safra Center for Ethics; University of Warwick - Department of Economics

Stephen J. Machin

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP); London School of Economics & Political Science (LSE) - Department of Economics

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2008

Abstract

Although there is a large literature on the economic effects of minimum wages on labour market outcomes (especially employment), there is much less evidence on their impact on firm performance. In this paper we consider a very under-studied area - the impact of minimum wages on firm profitability. The analysis exploits the changes induced by the introduction of a national minimum wage to the UK labour market in 1999, using pre-policy information on the distribution of wages to construct treatment and comparison groups and implement a difference in differences approach. We report evidence showing 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). We find that net entry rates have fallen, but that the changes in exit and entry rates are statistically insignificant.

Suggested Citation

Draca, Mirko and Machin, Stephen J. and Van Reenen, John Michael, Minimum Wages and Firm Profitability (May 2008). NBER Working Paper No. w13996. Available at SSRN: https://ssrn.com/abstract=1133911

Mirko Draca (Contact Author)

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

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Harvard University - Edmond J. Safra Center for Ethics ( email )

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University of Warwick - Department of Economics ( email )

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Stephen J. Machin

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
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London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

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Stanford Graduate School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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