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Minimum Wages, Taxes and Low Wage Labor Markets

Paper Session

Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PST)

Marriott Marquis, Marina Ballroom D
Hosted By: American Economic Association
  • Chair: David Card, University of California-Berkeley

Reallocation Effects of the Minimum Wage: Evidence from Germany

Christian Dustmann
,
University College London
Attila Lindner
,
University College London
Uta Schönberg
,
University College London
Matthias Umkehrer
,
Institute for Employment Research-Nuremberg (IAB)
Philipp von Berge
,
Institute for Employment Research-Nuremberg (IAB)

Abstract

In this paper, we investigate the wage, employment and reallocation effects of Germany’s first-time
introduction of the nation-wide minimum wage, affecting 15% of its employees. Based on various
difference-in-difference style specifications that exploit variation in the exposure to the minimum wage
across individuals, regions, and firms, we find that the minimum wage raised wages, and did not lower
employment. At the same time, the minimum wage leads to reallocation effects. At the individual level, the
minimum wage increased the probability that a low wage worker (but not a high wage worker) moves from
a small, low paying firm to a larger, higher paying firm. This worker upgrading to better firms can account
for up to 30% of the wage increase induced by the minimum wage. Moreover, at the regional level, average
firm quality (measured as firm size or fixed firm wage effect) increased in regions more affected, relative
to regions less affected, by the minimum wage in the years following the introduction of the minimum
wage. Lastly, at the firm level, small firms declined in size and shut down, whereas larger firms expanded,
in response to the minimum wage.

The Effects of Minimum Wage on Firm Practices and Management

Dara Lee Luca
,
Mathematica Policy Research
Michael Luca
,
Harvard Business School

Abstract

Recent years have witnessed sharp increases in the minimum wage across a number of cities in the United States. We find that the impact of the minimum wage depends on whether a restaurant was already close to the margin of exit. Restaurants with lower ratings are closer to the margin of exit at all observed minimum wage levels, and are disproportionately driven out of business by increases to the minimum wage. Our point estimates suggest that a one dollar increase in the minimum wage leads to a 10 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating on Yelp), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale). We expand the analysis to look at prices using data from delivery orders, and find that lower rated restaurants also increase prices in response to minimum wage increases.

We are continuing this exploration by delving into other margins through which restaurants respond to exogenous increases to labor costs. To the extent that x-inefficiency exists, higher minimum wages might “shock” firm managers into adopting more productive and efficient management (Altman 1992, Leibenstein 1978). We explore whether lower rated firms are proxying for poorly managed firms with limited scope for x-inefficiency style gains by examining the heterogeneous ways firms adjust to wage shocks, and whether highly rated firms are systematically different in their management practices. For example, we examine whether restaurants adopt relatively low cost tactics to innovate and increase revenue, such as posting pictures of their food or menu online, respond to Yelp reviews, or utilize other tactics to encourage retention (e.g. loyalty programs) or structured feedback (e.g. incentives to leave reviews), or offer online reservations.

Labor Market Responses to Payroll Tax Subsidies

Thomas Breda
,
Paris School of Economics
Luke Haywood
,
DIW Berlin
Haomin Wang
,
University of Konstanz

Abstract

Payroll tax reductions are a popular tool to lower the minimum labor cost and encourage
employment and job creation. Effects of these tax reductions go beyond the directly affected.
A particular concern about such policies is that more productive jobs may be replaced with less
productive ones. We examine payroll tax reductions using an equilibrium search-and-matching
model estimated from the French administrative data. We find that lowering taxes on low-paid
work induces low-productivity workers to enter the labor market and low-productivity firms to
post more vacancies. These behaviors congest the labor market, resulting in lower employment
among high-productivity workers and negative impacts on aggregate production. We find that,
rather than reducing taxes for a wide range of jobs, restricting payroll tax reductions to minimum
wage jobs helps low-wage workers, but the resulting congestion effect is also stronger. Taking
this trade-off into account, we determine the optimal targeting of payroll tax reductions.

The Price and Employment Response of Firms to the Introduction of Minimum Wages

Sebastian Link
,
ifo Institute & University of Munich

Abstract

This paper studies the price and employment response of firms to the introduction
of a nation-wide minimum wage in Germany. Instead of reducing employment, affected
firms raised prices to absorb the increase in the wage bill. The price effect is prevalent across different sectors of the economy including manufacturing and is thus not limited to low-wage industries. The results indicate that speed and degree of price pass-through were remarkably high and substantial. Moreover, I find considerable heterogeneity in firms’ responses to the minimum wage depending on their own business expectations, product market competition, and local labor market conditions.
Discussant(s)
David Card
,
University of California-Berkeley
Michael Reich
,
University of California-Berkeley
Suphanit Piyapromdee
,
University College London
Attila Lindner
,
University College London
JEL Classifications
  • J2 - Demand and Supply of Labor
  • H2 - Taxation, Subsidies, and Revenue