Do CEOs Benefit from Employee Pay Raises? Evidence from a Federal Minimum Wage Law

59 Pages Posted: 22 Nov 2022 Last revised: 11 Dec 2023

See all articles by Ekaterina Potemkina

Ekaterina Potemkina

Indiana University - Kelley School of Business - Department of Finance

Date Written: November 17, 2022

Abstract

Using an about 40% U.S. federal minimum wage hike as a natural experiment, I establish an about 2.6% spillover effect of worker wages on CEO pay in smaller and medium U.S. public firms by employment size. I exploit a triple-differences methodology based on the distribution of workers across states. After the hike, a 10% increase in employment share in states bound by federal minimum wage leads to an about 7.7% increase in CEO total pay for firms in minimum-wage-sensitive industries relative to other industries. The results are consistent with CEOs demanding a compensation raise following an exogenous employee pay increase due to fairness concerns and inconsistent with the efficiency wages mechanism or CEOs extracting rents due to strong bargaining power. The results are robust to controlling for firm profitability, observable firm characteristics (matched sample), and local economic conditions (sample of firms headquartered in counties along contiguous state borders).

Keywords: executive compensation, employee pay, minimum wages, fairness

JEL Classification: G34, J31, J38, D63

Suggested Citation

Potemkina, Ekaterina, Do CEOs Benefit from Employee Pay Raises? Evidence from a Federal Minimum Wage Law (November 17, 2022). Available at SSRN: https://ssrn.com/abstract=4280044 or http://dx.doi.org/10.2139/ssrn.4280044

Ekaterina Potemkina (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
221
Abstract Views
868
Rank
260,844
PlumX Metrics