Firm Dynamics and the Minimum Wage: A Putty-Clay Approach

61 Pages Posted: 19 Dec 2013

See all articles by Daniel Aaronson

Daniel Aaronson

Federal Reserve Bank of Chicago

Eric French

Department of Economics; Institute for Fiscal Studies (IFS)

Isaac Sorkin

University of Michigan at Ann Arbor

Date Written: December 14, 2013

Abstract

We document two new facts about the market-level response to minimum wage hikes: firm exit and entry both rise. These results pose a puzzle: canonical models of firm dynamics predict that exit rises but that entry falls. We develop a model of firm dynamics based on putty-clay technology and show that it is consistent with the increase in both exit and entry. The putty-clay model is also consistent with the small short-run employment effects of minimum wage hikes commonly found in empirical work. However, unlike monopsony-based explanations for small short-run employment effects, the model implies that the efficiency consequences of minimum wages are potentially large.

Keywords: Firm exit, firm entry, putty-clay, minimum wage

JEL Classification: J23, J30, L10

Suggested Citation

Aaronson, Daniel and French, Eric and Sorkin, Isaac, Firm Dynamics and the Minimum Wage: A Putty-Clay Approach (December 14, 2013). FRB of Chicago Working Paper No. 2013-26, Available at SSRN: https://ssrn.com/abstract=2369447 or http://dx.doi.org/10.2139/ssrn.2369447

Daniel Aaronson (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States

Eric French

Department of Economics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Isaac Sorkin

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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