Minimum wage effects across heterogeneous markets

Previous studies have reached little consensus on the employment effect of the minimum wage. This paper argues that local labor markets are heterogeneous, in that the impact of the minimum wage is concentrated in specific markets. In particular, we estimate the extent of surplus between each plant's value of marginal product of labor and wage rate and examine whether the minimum wage impact varies across markets with a differential surplus. Building on the recent policy changes in Japan, we find that the employment effect of an increase in the minimum wage is significant and negative in plants for which the value of marginal product of labor is close to the wage rate and which experienced little surplus pre-reform. The minimum wage increases have little employment effect on plants with a relatively high surplus, even when they have a significant number of minimum wage employees.