Minimum Wages and Firm Profitability

IZA Discussion Paper No. 1913

CEP Discussion Paper No. 715

50 Pages Posted: 25 Jan 2006

See all articles by Mirko Draca

Mirko Draca

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP); Harvard University - Edmond J. Safra Center for Ethics; University of Warwick - Department of Economics

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

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: January 2006

Abstract

Although there is a large literature on the economic effects of minimum wages on labour market outcomes (especially employment), there is hardly any evidence on their impact on firm performance. This is surprising: minimum wages appear to have a significant impact on wages, but only a limited impact on jobs, so it is natural to imagine there must be a stronger impact on other aspects of firm behaviour. In this paper we consider the impact of minimum wages on firm profitability by exploiting the introduction of a minimum wage to the UK labour market in 1999. We use pre-policy information on the distribution of wages to construct treatment and comparison groups and implement a difference in differences approach. We show evidence that firm profitability was significantly reduced (and wages significantly raised) by the minimum wage introduction. This emerges from separate analyses of two distinct types of firm level panel data (one on firms in a very low wage sector, UK residential care homes, and a second on firms across all sectors). Interestingly, we find no evidence that the profitability reductions resulted in increases in firm exit, so our findings may be consistent with redistribution of quasi-rents towards low wage employees.

Keywords: minimum wage, profitability, exit

JEL Classification: J23, L25

Suggested Citation

Draca, Mirko and Machin, Stephen J. and Van Reenen, John Michael, Minimum Wages and Firm Profitability (January 2006). IZA Discussion Paper No. 1913; CEP Discussion Paper No. 715. Available at SSRN: https://ssrn.com/abstract=877892

Mirko Draca

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

Houghton Street
London WC2A 2AE
United Kingdom
+20 7955 7010 (Phone)

Harvard University - Edmond J. Safra Center for Ethics ( email )

124 Mount Auburn Street
Suite 520N
Cambridge, MA 02138
United States

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

Stephen J. Machin (Contact Author)

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

John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6976 (Phone)
+44 20 7955 6848 (Fax)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom
+44 20 7240 6740 (Phone)
+44 20 7240 6136 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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