Downward Wage Ridigity, Corporate Investment, and Firm Value
57 Pages Posted: 16 Sep 2016 Last revised: 29 Jan 2023
Date Written: November 3, 2022
Abstract
Firms reduce investment when facing downward wage rigidity (DWR). I construct DWR measures and exploit staggered state-level changes in minimum wage laws as an exogenous variation in DWR to document this fact. Following a one-standard-deviation increase in the minimum wage, firms reduce investment rates by 2.68 percentage points. The investment cut cannot be explained by labor adjustment under capital-labor complementarities. I identify aggravation of debt overhang and increased operating leverage as mechanisms by which DWR impedes investment. Finally, DWR enhances value and production efficiency when firms are subject to other frictions causing overinvestment, consistent with the theory of second best.
Keywords: Downward Wage Rigidity, Corporate Investment, Minimum Wage Laws, Theory of Second Best
JEL Classification: D25, I38, J31, J38, K31
Suggested Citation: Suggested Citation