Minimum Wages and the Distribution of Firm Wage Premia

This paper leverages a large minimum wage reform in Uruguay to study the effects of minimum wages on the distribution of firm wage premia. Wage inequality decreased substantially after the reform, with almost all of the decrease attributed to a reduction in 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 that 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 analyses 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" by "making bad jobs better", in addition to reallocating workers towards "good jobs".