How do Firms Respond to a Minimum Wage Hike?
Early Career Research Award
This paper investigates how adjustment strategies to a minimum wage hike vary across firms, and what drives these differences. We analyze the short-term impacts of the 2015-2016 minimum wage hike in Seattle on wage bill, labor demand and firm revenue using the confidential data on firms from Unemployment Insurance records and gross revenue tax records in the State of Washington. Our preliminary results suggest that firms with high costs of compliance with the minimum wage hike cut jobs and hours to prevent their total labor costs from rising, while firms with low costs of compliance do not adjust their labor demand and instead incur an increase in total labor costs. Following these findings, we ask whether the differences in firms’ adjustment strategies are driven by firms’ initial productivity or by their ability to pass the minimum wage to consumers through price increases. Though our results are consistent with the small overall disemployment effect of minimum wage hikes found in the prior literature, they point out that the impact of a minimum wage hike might depend on the distribution of firm profitability and the nature of competition in the local markets.