How do Firms Respond to an Increase in Minimum Wages? Primary evidence on plants' internal adjustments

Author Name OKUDAIRA Hiroko  (Okayama University) /TAKIZAWA Miho  (Toyo University) /OHTAKE Fumio  (Osaka University) /TSURU Kotaro  (Faculty Fellow, RIETI)
Creation Date/NO. March 2013 13-J-010
Research Project Reform of Labor Market Institutions
Download / Links


Recent developments in empirical studies have shown that an increase in minimum wages has a non-negative overall employment effect, which is inconsistent with the prediction generated by the textbook competitive labor market model. This paper examines the mechanism that explicitly explains this "inconsistent" evidence by directly estimating how far a plant is from its optimal decision in a competitive environment. In particular, we estimate the gap between each plant's value of marginal product of labor (VMPL) and wage rate using a plant-level dataset from Japan's Census of Manufactures. In this preliminary version of the paper, we find that in response to an increase in minimum wage, plants experience an increase in the negative gap (i.e., VMPL - wage rate < 0).