How Do Firms Respond to Minimum Wage Increases? Understanding the Relevance of Non-Employment Margins

Abstract

This paper discusses non-employment margins through which firms may respond to minimum wage increases. Margins of interest include evasion, output prices, noncash compensation, job attributes including effort requirements, the firm’s mix of low- and high-skilled labor, and the firm’s mix of labor and capital. I discuss the basic theory behind each margin’s potential importance as well as findings from empirical research on their real-world relevance. Additionally, I present a set of pedagogical diagrams that show how supply and demand analyses of labor markets can be extended to bring additional nuances of real-world markets into the classroom.