Wednesday, January 17, 2018 | 2:00pm-3:30pm | Room 337, HSBC Business School Building

Abstract

Firms reduce investment when facing downward wage rigidity (DWR), the inability or unwillingness to adjust wages downward. 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 minimum wage, firms reduce their investment rate by 2.68 percentage points. I identify increased operating leverage and aggravation of debt overhang as mechanisms by which DWR impedes investment. Finally, this labor market friction enhances firm value and production efficiency when firms are subject to other frictions causing overinvestment, consistent with the theory of second best.