Minimum Wages and Insurance within the Firm

Abstract

Minimum wages alter the allocation of firm-idiosyncratic risk across workers. To establish this result, we focus on Italy, and leverage employer-employee data matched to firm balance sheets and hand-collected wage floors. We find a relatively larger pass-through of firm-specific labor-demand shocks into wages for the workers whose earnings are far from the floors, but who are employed by establishments intensive in minimum-wage workers. We study the welfare implications of this fact using an incomplete-market model. The asymmetric passthrough uncovers a novel channel which tilts the benefits of removing minimum wages toward high-paid employees at the expense of low-wage workers.

Keywords: firm-specific shocks, pass-through, minimum wages, linked employer-employee data, general equilibrium, complementarities

JEL Classification: E24, E25, E64, J31, J38, J52