Damián Vergara, University of Michigan

Paper: Minimum Wages and the Distribution of Firm Wage Premia

Abstract: This paper leverages a large minimum wage reform in Uruguay to study the effects of minimum wages on the distribution of firm wage premia. We document a substantial decrease in wage inequality after the minimum wage reform, almost completely driven by a reduction of between-firm inequality. AKM variance decompositions show that the relative variance of firm fixed effects substantially decreased after the reform. A time-varying AKM model reveals this pattern was driven by a compression in the distribution of firm fixed effects, with low-paying firms increasing their fixed effect after the minimum wage increase. Both firm-level and worker-level difference-in-differences models show that the minimum wage reform had a causal effect on the compression in the distribution of firm wage premia. The results suggest that minimum wages can increase the supply of “good jobs” not only through reallocation effects but also by “making bad jobs better”.