Essays on the economic incidence of minimum wage policies




Garita Garita, Jonathan

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Minimum wage policies are implemented worldwide to protect workers and reduce inequality. This dissertation analyzes the effects of raising minimum wages on firms to shed new light on the policy's trade-offs. Additionally, this research provides new insights on how firms adjust their production process in response to a relative increase in the labor costs. For such purpose, I investigate Costa Rica's occupation-specific minimum wage setting.

The first chapter focuses on different margins of firm and employment dynamics. I assemble rich administrative data covering the universe of workers and firms in 2006-2017 to construct firm-level exposure measures to the minimum wage policy. Then, I estimate the impact of differential exposure to the minimum wage on firm outcomes at several year horizons. The analysis suggests that minimum wages induce firms to increase their labor shares, but with a negative and persistent impact on their profitability. The positive effect on the labor shares moderates as firms reduce their employment levels and expand their capital stocks. Even though surviving firms slightly reduce their employment levels, they experience a substantial decline in hiring rates. Furthermore, employment elasticities are negative and more significant when accounting for the extensive margin effects (firm exit). Workers in occupations that are more susceptible to technology substitution face more substantial employment reductions.

The second chapter studies the substitution dynamics between capital and labor using Costa Rica's minimum wage setting. I estimate the change in the capital and labor ratios after a minimum wage increase, finding important heterogeneity across occupational groups. Workers in low-skilled and routine intensive occupations experience more intensive substitution effects. Then, I exploit the diverse reduced-form elasticities to compute micro-elasticities of substitution between capital and labor. I consistently find a value below one, suggesting that the substitution away from labor towards capital is not large enough to reduce the labor share after a minimum wage increase. Specifically, I compute an elasticity of 0.59 for all firms, and significant heterogeneity across representative sectors, stressing differences in the production technologies across industries. The estimated value is higher in manufacturing (0.81) and tradable sectors (0.76) but smaller in non-tradable sectors (0.46).

The third chapter examines the effect of raising minimum wages on firm entry and the associated implications on aggregate employment dynamics. The results of the analysis indicate that increasing the minimum wages led to a reduction in firm entry rates between 3.7 and 5.4 percent. I then exploit a dynamic framework of employment based on \cite{pugsley2019grown} to show that changes in the minimum wage has sizeable consequences on aggregate employment by deterring new firms from entering the market. Aggregate employment in Costa Rica is around 0.8 lower by 2017 due to the missing entrants induced by the policy.



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