Firms' Risk Adjustments to Minimum Wage: Financial Leverage and Labor Share Trade-off

TL;DR

This study examines how the German minimum wage policy influences firms' financial leverage and labor share, revealing that firms deleverage in response to increased labor share, balancing worker benefits with financial risks.

Contribution

It provides empirical evidence on the impact of minimum wage on firms' leverage and labor share, highlighting the financial behavior response to wage policy changes.

Findings

Minimum wage reduces firms' financial leverage by 0.5 to 0.9 percentage points.

Minimum wage increases labor share without significant capital-labor substitution.

Firms deleverage as a response to increased labor share, indicating conservative financial behavior.

Abstract

This paper evaluates the impact of the German minimum wage policy on firms' financial leverage. By using a comprehensive firm-establishment-employee linked dataset and a difference-in-differences estimation with firm-level variation in treatment intensity, the analysis shows that the average minimum wage level reduces firms' financial leverage by about 0.5 to 0.9 percentage points, corresponding to 1 to 2 percent of the mean of financial leverage. Further investigation of the mechanism shows that the minimum wage does not lead to significant capital-labor substitution; therefore, the labor share increases. Firms react to the increased labor share by deleveraging. The results suggest that while the minimum wage benefits workers by allocating more earnings to the labor force, it also introduces greater operating risks and encourages conservative financial behavior among firms.