Reshaping the Firm Size Distribution of Jobs: Minimum Wages and Firm Dynamics in Employment

Abstract

This paper examines how minimum wage increases affect firm production decisions across firm size in the manufacturing and retail sectors. Using restricted firm- and establishment-level data from the US Census, we use a stacking and synthetic difference-in-differences approach to estimate the average treatment on the treated (ATT) resulting from minimum wage increases on employment and other secondary production-related measures. In particular, we find substantial heterogeneity in employment responses by firm size, with disemployment effects concentrated among smaller firms and positive effects observed among larger firms. To rationalize these findings, we develop a dynamic model of monopsonistic competition featuring a CES production function and endogenous firm entry and exit, calibrated to match the empirical treatment effects. We then use the model to quantify the short- and long-run macroeconomic effects of minimum wage increases of varying magnitudes. We estimate wage markdowns as approximately 88-92% of the marginal product of labor. Temporary minimum wage increases generate null or negative aggregate employment effects in both the manufacturing and retail sectors. Permanent minimum wage increases equivalent to a historically average $1 raise in our sample led to employment gains of 0.3% in retail, whereas a ``$15" minimum wage results in employment declines ranging from 1% to 10%.