Minimum Wage, Market Imperfection, and Production Efficiency: Panel Event Study in Vietnam

Abstract

Industries in developing countries involve a host of small businesses which compete with foreign or state-owned firms. This paper examines how an unexpected spike of minimum wages disproportionately affected productivity of domestic and foreign firms under the mixed market structure using Vietnam's enterprise census. While foreign firms were shielded from the policy shock, production of domestic firms has become smaller and informal. A panel event study estimation finds that small domestic firms constrained by the minimum wage regulation significantly reduced employment (-14%), profit margins (-1 percentage point) and TFP (-2%) over three years. Unproductive capital-labor adjustments contributed to the productivity loss. Moreover, a triple-difference regression indicates that small firms faced significantly large negative minimum wage effect when foreign or state-owned firms held strong price setting power in the same market.