Federal Reserve Bank of Chicago
Working Paper Series
Firm Dynamics and the Minimum Wage: A Putty-Clay Approach
We document two new facts about the market-level response to minimum wage hikes: firm exit and entry both rise. These results pose a puzzle: canonical models of firm dynamics predict that exit rises but that entry falls. We develop a model of firm dynamics based on putty-clay technology and show that it is consistent with the increase in both exit and entry. The putty-clay model is also consistent with the small short-run employment effects of minimum wage hikes commonly found in empirical work. However, unlike monopsony-based explanations for small short-run employment effects, the model implies that the efficiency consequences of minimum wages are potentially large.
Cite this item
Daniel Aaronson & Eric French & Isaac Sorkin, Firm Dynamics and the Minimum Wage: A Putty-Clay Approach, Federal Reserve Bank of Chicago, Working Paper Series WP-2013-26, 14 Dec 2013.
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
Keywords: Employment; minimum wage; putty-clay model
This item with handle RePEc:fip:fedhwp:wp-2013-26
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