Since late 2014, Portuguese Governments adopted an ambitious policy of minimum wage increases. In this paper, using linked employer-employee data for the Portuguese economy in the period 2013-2017, we show that minimum wage increases reduced employment and profitability. Our results show that the impact on the employment and profitability of financially distressed firms is twice the impact for non-financially distressed firms. We also evaluate the impact of minimum wage policies on exit. Our results show that minimum wage increases had a positive impact on firms’ exit. This impact was amplified for financially distressed firms.
These results suggest that minimum wage policies may have had a supply side effect by accelerating their death and, thus, breaking the deadlock of zombie firms’ congestion. By eliminating low profitability firms, which are also the least productive, minimum wage policies may have contributed to improve aggregate productivity through a cleansing effect.