Internal Organization of Firms and Minimum Wage Spillovers

Abstract

This paper provides empirical evidence that firms' internal organization and associated pay policies shape the propagation of minimum wage spillovers. Rigid, tournament-like firms use between-level pay differentials to incentivize workers and respond to minimum wage hikes by raising wages up the hierarchy, amplifying spillovers. Flexible firms rely more on individual wage-setting and can limit spillovers. I study these mechanisms through a simple model of firm organization and pay policies. Using rich administrative employer-employee data from Portugal, I study two minimum wage hikes and construct measures of firm rigidity to examine how organizational structure shapes the strength of spillovers. Spillovers from the minimum wage reach the 47th percentile of the wage distribution, and represent around 40% of the direct effect on minimum wage workers. I show that spillovers are up to 40% stronger in rigid firms, with well-defined hierarchies and structured pay policies. These findings have broader implications for a wide range of shocks that shift relative pay within firms.

Keywords: Minimum Wage, Spillovers, Pay Policies, Internal Organization of Firms

JEL Classification: J31, J38, J41, L22