Abstract
In this paper, we investigate how the increase in minimum wages affect firm profitability. We focus on the firm-level panel data in Poland, where minimum wage growth remained stable and averaged around 4 percent between 2003 and 2007 butaccelerated to 20 percent in 2008.
Implementing a difference-in-difference approach in this quasi-experimental setting, we find that the minimum wage increase contributed positively to average wages and negatively to firm profitability. Intuitively, the increased labor costs due to a higher wage floor directly reduce profits in the absence of labor demand adjustments.
We formally test and confirm validity of theseempirical predictions in a simple theoretical model of a profit maximizing firm.