Peter Orazem (Iowa State University)

Thursday, November 3, 2022 - 3:40 pm to 5:00 pm

Description: Labor-Public Economics Workshop: Peter F Orazem

Location: 368A Heady Hall

Contact Person: John Winters

Title: Minimum Wage Effects on Firm Entry and Exit in High- and Low-wage Markets

Abstract: While the effects of minimum wages on employment may be ambiguous, the theory predict a decrease in firm profitability and firm numbers regardless of whether the firm is a monopsonist, a monopolist, or a perfectly competitive firm. However, a uniform increase in the minimum may provide a competitive advantage to some firms while disadvantaging others, depending on relative market power, market size, or technology employed. This paper estimates how minimum wages affect firm entry and firm exits overall, by sector, and for urban and rural markets from 1999-2019. To control for unobserved market factors and to exploit the regression discontinuity, we conduct the analysis at state borders that differ in the minimum wage. Among the findings:

1. The minimum wage significantly decreases net establishment entry. It does so by significantly increasing the rate of firm exits. Firm entrants are not negatively affected, presumably because they can select production methods that lower the cost of the minimum wage increase, giving start-ups an advantage over incumbent firms.

2. The increase in firm exits is found overall, in low wage sectors, and in metro and rural markets.

3. We find that the side of the border with the higher minimum wage experiences lower firm entry rates and higher firm exit rates compared to its neighbor across the border.