Now You See It, Now You Don't: Financial Constraints, Minimum Wage Policies, and Employment

Corporate financial constraints play a crucial role in explaining the effect of minimum wage policies on employment levels. Using a border discontinuity design and establishment and firm-level information, we show that minimum wage increases, on average, have no significant impact on employment levels. However, we find a negative and economically significant effect on employment at establishments belonging to financially constrained firms. We provide causal evidence about this relationship using a unique quasi-experimental setting, namely, the federal minimum wage rise during the 2007-2008 financial crisis combined with an exogenous financial constraint due to ex-ante heterogeneity in firms’ long-term debt maturity structure.