Research conducted by Matt Gustafson, Penn State Smeal associate professor of finance and Stuart and Michele Rothstein Early Career Professor, reveals that, particularly in industries most exposed to minimum-wage labor, minimum wage increases lead these firms to cut capital expenditures.
In recent years several states—including California, Illinois, Maryland, Massachusetts, New Jersey, New York, as well as Washington D.C.—have passed laws to increase their minimum wages to $15 per hour—more than double the current federal rate of $7.25.
"This movement has created immense political pressure to raise the federal minimum wage," said Gustafson. "But policy debates are complicated because the effect of higher minimum wages on businesses and low-wage workers remains uncertain."
In a recent research paper published in Management Science, Gustafson, along with Jason D. Kotter, assistant professor of finance at Brigham Young University, examined the effect of minimum wages on the capital expenditures of U.S. public firms. They report that, particularly in industries most exposed to minimum-wage labor, minimum wage increases lead these firms to cut capital expenditures.
In the United States, the industries that employ the most minimum-wage workers by far are retail, restaurants and entertainment. In fact, in 2012, the Current Population Survey used in the study showed that retail, restaurant and entertainment employ over 70% of minimum wage labor, with no other industry employing...
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