Social Innovation

How do minimum wage increases affect firm dynamics?

Image: Workers on the assembly line replace the back covers of 32-inch television sets at Element Electronics in Winnsboro, South Carolina. REUTERS/Chris Keane.

Nick Bunker
Policy Analyst, Washington Center for Equitable Growth
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Discussion of the minimum wage—at least in the empirical literature about it—often focuses on what happens to affected workers. The vast research on minimum-wage hikes mostly focuses on the level of employment, with the occasional paper on worker flows. But workers are just one side of a job. Minimum-wage hikes could influence the dynamics of firms as well.

A new paper presented at the annual Allied Social Science Associations meeting in San Francisco looks at how minimum-wage hikes affect firm dynamics. Interestingly, it finds that the churn of business establishments actually seems to increase after a minimum wage hike—that is, establishments are more likely to enter into and out of existence after the minimum wage is increased.

The paper’s authors—Daniel Aaronson of the Federal Reserve Bank of Chicago, Eric French of University College London, and Isaac Sorkin of the University of Michigan—use a dataset called the Quarterly Census of Employment and Wages. This very detailed dataset from the U.S. Bureau of Labor Statistics lets the economists know an establishment’s employment level as well as its location. The location bit is important as it lets the researchers compare changes in businesses in a county with a minimum-wage hike compared to those in a county that didn’t have an increase. (Note that the study looks at the effects on establishments rather than firms. Establishments are specific business locations which can be part of a firm. Think of specific stores of a chain restaurant.)

The paper’s finding that the churn of establishments increases after a minimum wage hike is especially interesting when compared to the research on labor flows after hikes, which finds reduced labor turnover for affected workers. At the same time, chain restaurants seem to be the ones experiencing the most churn. Full-service restaurants (more traditional, sit-down restaurants) do not seem to respond to minimum wage hikes according to the results. As the authors note, chain restaurants hire more minimum-wage workers so it makes sense that those establishments would be more affected by the minimum-wage hike.

An interesting possibility is that the kind of establishments that flow into the market after the minimum-wage hike is different from those that leave. A result of the authors’ theoretical model is that more capital-intensive establishments enter while more labor-intensive firms exit. Again, this makes sense as the minimum-wage increase is making labor more expensive.

In the short term, however, employment doesn’t seem to change all that much in response to the minimum-wage hike. In the authors’ model, there is eventually a decrease in employment. But that’s an assumption of their model with parameters from the data and not an empirical finding like the earlier results.

While the employment effect of the minimum wage is a highly studied area of empirical research, there are clearly other areas related to minimum-wage hikes that are ripe for investigation. Continued digging into policies related to the low-wage labor market and their consequences will likely produce interesting and important research for quite a while.

Author: Nick Bunker is a Policy Analyst with the Washington Center for Equitable Growth.

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Related topics:
Social InnovationJobs and the Future of WorkEconomic Growth
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