Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/299416 
Year of Publication: 
2024
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-1578
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
This paper studies the effects of the minimum wage on the life cycle of firms. We first build a tractable model where heterogeneous firms have labor market power, invest in innovation, and choose formal or informal sectors. The model predicts that a minimum wage hike not only shrinks young and low-productivity firms but also lowers incentives to innovate, resulting in lower life cycle growth. We then test the predictions of the model using Brazilian administrative and census data leveraging the variation in exposure across establishments and municipalities to the large increase in the minimum wage between 1999 and 2010. At the establishment level, an increase in the minimum wage: i) decreases the growth rates of small and young establishments and ii) increases the growth rates of old and large establishments. When analyzing exposed municipalities, we observe an increase in the earnings of workers in both the formal and informal sectors, as well as informal employment. Our findings suggest that the minimum wage is a possible explanation for the decline in the importance of young establishments and business dynamism in Brazil.
Subjects: 
Minimum wage
Business dynamism
Monopsony
Firm heterogeneity
Informality
JEL: 
J38
J42
E24
E26
L25
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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