The Minimum Wage in Firms’ Organizations: Productivity Implications

Firm organizations are designed to compress unit costs in general, and wage costs in particular. We build on this intuition to study how minimum wages affect firms' organizations, production costs and, ultimately, productivity. To this end, we construct a general equilibrium model in which firms rely on optimal hierarchies to optimize the use of labor and associated knowledge (training). The introduction of a minimum wage constraint in such an environment alters firms' optimal strategies when knowledge acquisition costs are large relative to management costs. We calibrate this model on French data to quantify the impact of the large increases in the minimum wage (up to 8.5% in real terms) that occurred for some firms between 2003 and 2006. We find that the endogenous contraction and flattening responses of firms' organizations strongly contributes to mitigating the overall loss in output (simulated at about 2%). This is driven by gains in revenue productivity (by about 4%) and wages (6.8%), while the impact on quantity-based productivity indices is not monotonic across firm types. These results are confirmed in the French data, both qualitatively and quantitatively, by regression analyses combining difference-in-differences and instrumental variable strategies. Further simulations show that the relative cost of minimum wage constraints tends to be amplified in economies with more efficient communication technologies, and mitigated in economies with more efficient information or problem-solving technologies. However, this last result does not hold for large technological shocks, which suggests that the current waves of new AI-based technologies, as well as the massive investments in communication technologies during the recent Covid-19 pandemic, are likely to necessitate a thorough re-examination of cost-benefit analyses of labor market institutions and regulations.