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

50 Pages Posted: 17 Feb 2016

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 2016

Abstract

We document three new findings about the industry-level response to minimum wage hikes. First, restaurant exit and entry both rise following a hike. Second, the rise in entry and exit is concentrated in chains. Third, there is no change in employment among continuing restaurants. We develop a model of industry dynamics based on putty-clay technology and show that it is consistent with these findings. In the model, continuing restaurants cannot change employment, and thus industry-level adjustment occurs through exit of labor-intensive restaurants and entry of capital-intensive ones. We show these three findings are inconsistent with other models of industry dynamics.

Keywords: employment, industry dynamics, minimum wage, putty-clay

JEL Classification: E24, J36, L11

Suggested Citation

Aaronson, Daniel and French, Eric and Sorkin, Isaac, Industry Dynamics and the Minimum Wage: A Putty-Clay Approach (February 2016). CEPR Discussion Paper No. DP11097, Available at SSRN: https://ssrn.com/abstract=2733070

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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