Does a Minimum Wage Boost Automation and Outsourcing?

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The proposed research project analyzes the long-run adjustments of firms and workers in response to the introduction of a minimum wage. Our research project is motivated by recent technological advances which allow firms to substitute labor with relatively cheaper capital or outsource production steps to more cost-efficient firms. Yet, little is still known how minimum wage policies affect firms capital intensity and their organization of production, as well as the consequences for wages and employment of workers employed in those firms. To make progress in this direction, we use the variation induced by the introduction of industry-specific minimum wages in Germany since the 1990s. Combining rich firm- and worker-level data from social security records, we use detailed industry classifications to identify firms and workers in the covered industries. Our empirical strategy then combines matching with a difference-in-difference approach. We will first match for each covered firm (or worker) a control firm which in years prior to the adoption was similar to the covered firm in terms of the demographic or occupational structure, capital intensity and profits, but where the minimum wage was not adopted. To identify the effect of the minimum wage policy on capital intensity, the organization of production and the wage or employment structure, we then compare outcomes in covered and uncovered firms in the years after the introduction of the minimum wage. Our analysis seeks to answer five questions: 1) Do firms in covered industries become more capital-intensive or outsource production steps after the introduction of the minimum wage? 2) Do we observe these changes mostly among new firms or among incumbent firms in the covered industries? 3) Does a minimum wage lead to substitution of routine-task jobs by non-routine task jobs? 4) Are workers more likely to move from routine jobs to non-routine jobs within the covered industries; or are they more likely to leave the minimum wage industries altogether? 5) Which workers are most affected by these changes? Our findings contribute to the research on minimum wages by focusing on firms long-run adjustments in technology and the organization of production - rather than the short-run employment effects that much of the literature has focused on. Our research further adds to the RBTC and offshoring literature by analyzing whether a relative shift in input prices favors offshoring activities, capital investments or jobs performing non-routine tasks in covered industries. As such, our proposed research contributes to a long-standing debate whether new technologies may substitute for a substantial share of current jobs. Finally, our research has important policy implications. Minimum wages are often introduced to reduce inequality or support a so-called fair income. And yet, generous minimum wages may trigger the adoption of labor-saving technologies which may actually increase inequality rather than reduce it.