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

34 Pages Posted: 20 Feb 2018

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

Stanford University - Department of Economics

Ted To

Bureau of Labor Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: February 2018

Abstract

We document two new findings about the industry‐level response to minimum wage hikes. First, restaurant exit and entry both rise following a hike. Second, there is no change in employment among continuing restaurants. We develop a model of industry dynamics based on putty‐clay technology that is consistent with these findings. In the model, continuing restaurants cannot change employment, and thus industry‐level adjustment occurs gradually through exit of labor‐intensive restaurants and entry of capital‐intensive restaurants. Interestingly, the putty‐clay model matches the small estimated short‐run disemployment effect of the minimum wage found in other studies, but produces a larger long‐run disemployment effect.

Suggested Citation

Aaronson, Daniel and French, Eric and Sorkin, Isaac and To, Ted, Industry Dynamics and the Minimum Wage: A Putty‐Clay Approach (February 2018). International Economic Review, Vol. 59, Issue 1, pp. 51-84, 2018, Available at SSRN: https://ssrn.com/abstract=3125184 or http://dx.doi.org/10.1111/iere.12262

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
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Institute for Fiscal Studies (IFS) ( email )

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Isaac Sorkin

Stanford University - Department of Economics ( email )

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579 Serra Mall
STANFORD, CA 94305-6072
United States

Ted To

Bureau of Labor Statistics ( email )

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Room 4130
Washington, DC 20212
United States
202-691-6590 (Phone)
202-691-6583 (Fax)

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