What Do Establishments Do When Wages Increase? Evidence from Minimum Wages in the United States

I investigate how establishments adjust their production plans on various margins when wage rates increase. Exploiting state-by-year variation in minimum wage, I analyze U.S. manufacturing plants' responses over a 23-year period. Using instrumental variable method and Census Microdata, I find that when the hourly wage of production workers increases by one percent, manufacturing plants reduce the total hours worked by production workers by 0.7 percent and increase capital expenditures on machinery and equipment by 2.7 percent. The reduction in total hours worked by production workers is driven by intensive-margin changes. The estimated elasticity of substitution between capital and labor is 0.85. Following the wage increases, no statistically significant changes emerge in revenue, materials or total factor productivity. Additionally, I nd that when wage rates increase, establishments are more likely to exit the market. Finally, I provide evidence that when the minimum wage increases the wages of some of the establishments in a firm, the firm also increases the wages for its other establishments.