DP11097 Industry Dynamics and the Minimum Wage: A Putty-Clay Approach

Author(s): Daniel Aaronson, Eric Baird French, Isaac Sorkin
Publication Date: February 2016
Keyword(s): employment, industry dynamics, minimum wage, putty-clay
JEL(s): E24, J36, L11
Programme Areas: Labour Economics, Public Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11097

We document three new findings about the industry-level response to minimum wage hikes. First, restaurant exit and entry both rise following a hike. Second, the rise in entry and exit is concentrated in chains. Third, there is no change in employment among continuing restaurants. We develop a model of industry dynamics based on putty-clay technology and show that it is consistent with these findings. In the model, continuing restaurants cannot change employment, and thus industry-level adjustment occurs through exit of labor-intensive restaurants and entry of capital-intensive ones. We show these three findings are inconsistent with other models of industry dynamics.