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Minimum Wage Increase and Firm Profitability: Evidence from Poland

Author

Listed:
  • Mykola Babiak

    (CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences, Politickych veznu 7, 111 21 Prague, Czech Republic)

  • Olena Chorna

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 11000, Prague 1, Czech Republic)

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.

Suggested Citation

  • Mykola Babiak & Olena Chorna, 2019. "Minimum Wage Increase and Firm Profitability: Evidence from Poland," Working Papers IES 2019/14, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2019.
    • Handle: RePEc:fau:wpaper:wp2019_14
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    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/6074/lang/cs
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    More about this item

    Keywords

    Minimum wage; firm profitability; difference-in-difference;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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