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. The reform significantly decreased wage inequality, mainly by reducing between-firm inequality. AKM and time-varying AKM analyses reveal a large compression in the distribution of firm fixed effects after the reform, driven by an increase in the fixed effects of initially low-premium firms. Firm- and worker-level difference-in-differences analyses support a causal effect of the reform on the compression of firm fixed effects and document non-trivial spillovers to workers earning above the minimum wage. Different pieces of evidence suggest that increased rent sharing is a key mediator, and that the within-firm changes in firm fixed effects explain a sizable share of the post-reform inequality reduction. Results suggest minimum wages can increase the supply of “good jobs” by “making bad jobs better”.