Firm Dynamics and the Minimum Wage: A Putty-Clay Approach

Daniel Aaronson, Eric French and Isaac Sorkin

No WP-2013-26, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We document two new facts about the market-level response to minimum wage hikes: firm exit and entry both rise. These results pose a puzzle: canonical models of firm dynamics predict that exit rises but that entry falls. We develop a model of firm dynamics based on putty-clay technology and show that it is consistent with the increase in both exit and entry. The putty-clay model is also consistent with the small short-run employment effects of minimum wage hikes commonly found in empirical work. However, unlike monopsony-based explanations for small short-run employment effects, the model implies that the efficiency consequences of minimum wages are potentially large.

Keywords: Employment; minimum wages; putty-clay model (search for similar items in EconPapers)
JEL-codes: J23 J30 L10 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2013-12-14
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Citations: View citations in EconPapers (7)

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