Minimum Wages and Firm Value

56 Pages Posted: 9 May 2016

See all articles by Brian Bell

Brian Bell

London School of Economics & Political Science (LSE)

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

Abstract

How does the value of a firm change in response to a minimum wage hike? The evidence we have to date is not well-suited to answer this question, principally because events that have been studied are not completely unknown to the stock market or have uncertainty associated with them. This paper exploits the announcement of a sizeable change in the minimum wage in the UK that was both totally unanticipated and free of uncertainty. The stock market response of employers of minimum wage workers is examined in an event study setting, looking at minute-by-minute changes surrounding the announcement and at cumulative abnormal returns on a daily basis before and after the announcement. The analysis uncovers significant falls in the stock market value of low wage firms. The size of the fall in value is compared to the fall in profitability in response to the wage cost shock that will be induced by the announcement and is seen to be of a comparable magnitude.

Keywords: minimum wages, firm value

JEL Classification: J23, L25

Suggested Citation

Bell, Brian and Machin, Stephen J., Minimum Wages and Firm Value. IZA Discussion Paper No. 9914, Available at SSRN: https://ssrn.com/abstract=2776919

Brian Bell (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Stephen J. Machin

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

Houghton Street
London WC2A 2AE
United Kingdom

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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