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Minimum wage and financially distressed firms: another one bites the dust

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(2022) Labour Economics , 74

This paper assesses the impact on firms of minimum wage policies in Portugal since the end of the Financial Assistance Programme in 2014. The goal of those measures was to reduce poverty and income inequality. However, the strong increase in the share of workers earning the minimum wage, and the situation of vulnerability in which many firms found themselves following the economic and financial crisis of 2008/2013, generated public discussion about their ability to adjust to the increase in wage costs.

After the initial controversy, the discussion on this topic faded away because it occurred in the context of a substantial rise in employment and the economic recovery that followed. However, the impact of the COVID-19 pandemic crisis on the financial situation of firms has revived interest on the effects of minimum wage increase.

The results of this article suggest that minimum wage increases reduced employment growth and profits, and accelerated the exit of financially distressed firms. The authors also show that minimum wage increases acted as a potential accelerator of the exit of those firms, compensating for some inefficiency of the insolvency framework. Therefore, the article suggests that minimum wage increases produce a cleansing effect, which may foster a more efficient resource allocation and productivity growth.