Minimum wage and productivity: Evidence from Chilean manufacturing plants

Abstract

This paper analyzes the effects of the minimum wage on a firm's productivity. The main hypothesis is that an increase in the minimum wage has a negative effect on total factor productivity (TFP) due to the existence of labor adjustment costs. Using data from Chilean manufacturing plants for the period 1992-2005 and a difference-in-differences methodology, we find that an increase in minimum wage had a negative effect on TFP. Our estimates indicate that a real increase of about 22% in the minimum wage during the period 1998-2000 reduced TFP by 5.8% in low unskilled-intensive industries and 9.7% in high unskilled-intensive industries. These results are robust to alternative measures of productivity and to the inclusion of several covariates to avoid confounding effects of other policy changes or firms' exposure to minimum wage changes.