Internal Organization of Firms and Minimum Wage Spillovers

Best Paper Award EAYE 2025

Abstract

This paper provides empirical evidence that firms’ internal organization and pay-setting practices shape how minimum wage shocks propagate through the wage distribution. I analyze the effects of a binding minimum wage in a personnel economics model featuring two canonical compensation structures: rigid, job title based pay schedules and flexible, individualized pay. The same policy shock produces distinct spillover patterns depending on the firm’s compensation structure. Firms with rigid hierarchies preserve wage differentials by adjusting pay up the ladder, amplifying spillovers. Flexible systems, in contrast, limit such adjustments. Using linked employer–employee data from Portugal and two minimum wage hikes, I exploit variation in workers’ exposure and firms’ pay-setting practices to estimate spillover effects. These reach up to the median of the wage distribution and are driven primarily by firm responses rather than institutional constraints. Effects are about 30 percent larger in firms with rigid pay structures. The findings identify compensation practices as a key transmission channel through which minimum wage policy, and other shocks to relative pay, reshape the wage distribution.