Working Paper 2016-10: Brian Bell & Stephen Machin

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10042016-WP-minimum-wages-and-firm-value

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Authors:

Brian Bell, Associate Professor in Economics, University of Oxford
Stephen Machin, Director of the Center for Economic Performance, London School of Economics


Abstract:

How does the value of a firm change in response to a minimum wage hike? The evidence we have to date is not well-suited to answer this question, principally because events that have been studied are not completely unknown to the stock market or have uncertainty associated with them. This paper exploits the announcement of a sizable change in the minimum wage in the UK that was both totally unanticipated and free of uncertainty. The stock market response of employers of minimum wage workers is examined in an event study setting, looking at minute- by-minute changes surrounding the announcement and at cumulative abnormal returns on a daily basis before and after the announcement. The analysis uncovers significant falls in the stock market value of low wage firms. In the light of this finding, the paper concludes by discussing magnitudes of response, including longer term modes of firm adjustment to the cost shock induced by the minimum wage hike.