The Impact of the Minimum Wage on Firm Destruction, Employment and Informality

This paper studies the effects of a large increase in the minimum wage on the destruction of formal firms, and the associated impacts on employment, wages, and informality in a developing economy. It examines the ramifications of a 33 percent nominal increase in the minimum wage that took effect in...

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Main Authors:	Acar, Aysenur, Bossavie, Laurent, Makovec, Mattia
Format:	Working Paper
Language:	English
Published:	World Bank, Washington, DC 2019
Subjects:	MINIMUM WAGE EDUCATIONAL ATTAINMENT POVERTY LABOR PRODUCTIVITY FIRM BEHAVIOR
Online Access:	http://documents.worldbank.org/curated/en/922261550256034160/Do-Firms-Exit-the-Formal-Economy-after-a-Minimum-Wage-Hike-Quasi-Experimental-Evidence-from-Turkey http://hdl.handle.net/10986/31312

id	okr-10986-31312
recordtype	oai_dc
spelling	okr-10986-313122022-09-20T00:14:34Z The Impact of the Minimum Wage on Firm Destruction, Employment and Informality Acar, Aysenur Bossavie, Laurent Makovec, Mattia MINIMUM WAGE EDUCATIONAL ATTAINMENT POVERTY LABOR PRODUCTIVITY FIRM BEHAVIOR This paper studies the effects of a large increase in the minimum wage on the destruction of formal firms, and the associated impacts on employment, wages, and informality in a developing economy. It examines the ramifications of a 33 percent nominal increase in the minimum wage that took effect in Turkey in 2016. It utilizes an exceptionally rich, employer-employee-linked dataset that shows the wage distribution within firms, which enables to measure the degree of firms’ minimum-wage exposure, and to estimate causal effects using a difference-in-differences approach. The paper shows that raising the minimum wage substantially increased the destruction of formal firms, leading to a fall in the number of formal firms in the economy. Effects are concentrated among small firms with low levels of productivity; highly productive firms are unaffected. The minimum-wage increase had negative effects on formal employment that largely originated through firm destruction, rather than through cuts in formal employment within surviving firms. Among workers who lost jobs in firms that ultimately exited, only a minority had obtained new employment a year later. The minimum-wage increase was accompanied by a rise in inactivity and unemployment, rather than growth of informal employment, suggesting that workers who lost formal employment mostly failed to find new jobs one year after the minimum wage hike, even informally. While the higher minimum wage had large, positive effects on the wages of formally employed workers, limited effects on the wages of informal workers are reported. 2019-02-21T21:17:09Z 2019-02-21T21:17:09Z 2019-02 Working Paper http://documents.worldbank.org/curated/en/922261550256034160/Do-Firms-Exit-the-Formal-Economy-after-a-Minimum-Wage-Hike-Quasi-Experimental-Evidence-from-Turkey http://hdl.handle.net/10986/31312 English Policy Research Working Paper;No. 8749 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper Europe and Central Asia Turkey
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	MINIMUM WAGE EDUCATIONAL ATTAINMENT POVERTY LABOR PRODUCTIVITY FIRM BEHAVIOR
spellingShingle	MINIMUM WAGE EDUCATIONAL ATTAINMENT POVERTY LABOR PRODUCTIVITY FIRM BEHAVIOR Acar, Aysenur Bossavie, Laurent Makovec, Mattia The Impact of the Minimum Wage on Firm Destruction, Employment and Informality
geographic_facet	Europe and Central Asia Turkey
relation	Policy Research Working Paper;No. 8749
description	This paper studies the effects of a large increase in the minimum wage on the destruction of formal firms, and the associated impacts on employment, wages, and informality in a developing economy. It examines the ramifications of a 33 percent nominal increase in the minimum wage that took effect in Turkey in 2016. It utilizes an exceptionally rich, employer-employee-linked dataset that shows the wage distribution within firms, which enables to measure the degree of firms’ minimum-wage exposure, and to estimate causal effects using a difference-in-differences approach. The paper shows that raising the minimum wage substantially increased the destruction of formal firms, leading to a fall in the number of formal firms in the economy. Effects are concentrated among small firms with low levels of productivity; highly productive firms are unaffected. The minimum-wage increase had negative effects on formal employment that largely originated through firm destruction, rather than through cuts in formal employment within surviving firms. Among workers who lost jobs in firms that ultimately exited, only a minority had obtained new employment a year later. The minimum-wage increase was accompanied by a rise in inactivity and unemployment, rather than growth of informal employment, suggesting that workers who lost formal employment mostly failed to find new jobs one year after the minimum wage hike, even informally. While the higher minimum wage had large, positive effects on the wages of formally employed workers, limited effects on the wages of informal workers are reported.
format	Working Paper
author	Acar, Aysenur Bossavie, Laurent Makovec, Mattia
author_facet	Acar, Aysenur Bossavie, Laurent Makovec, Mattia
author_sort	Acar, Aysenur
title	The Impact of the Minimum Wage on Firm Destruction, Employment and Informality
title_short	The Impact of the Minimum Wage on Firm Destruction, Employment and Informality
title_full	The Impact of the Minimum Wage on Firm Destruction, Employment and Informality
title_fullStr	The Impact of the Minimum Wage on Firm Destruction, Employment and Informality
title_full_unstemmed	The Impact of the Minimum Wage on Firm Destruction, Employment and Informality
title_sort	impact of the minimum wage on firm destruction, employment and informality
publisher	World Bank, Washington, DC
publishDate	2019
url	http://documents.worldbank.org/curated/en/922261550256034160/Do-Firms-Exit-the-Formal-Economy-after-a-Minimum-Wage-Hike-Quasi-Experimental-Evidence-from-Turkey http://hdl.handle.net/10986/31312
_version_	1764474038718038016

The Impact of the Minimum Wage on Firm Destruction, Employment and Informality

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