How Does Declining Worker Power Affect Investment Sensitivity to Minimum Wage?

Abstract

Declining worker power has been advanced as an explanation for dramatic generational changes in the U.S. macroeconomic environment such as the substantial decline in labor's share of the national income, the loss of consumer purchasing power, and growing income and wealth inequality. In this paper, we consider microeconomic implications by examining the extent to which declining working power affects firm-level investment decisions as reflected in firm responses to mandated increases in the minimum wage. Over our sample period, we find that investment-wage sensitivities go from negative (when worker power constrains management) to insignificant (when management becomes less constrained and can pursue outside options). We also provide evidence on the channel through which declining worker power affects firm investment responses, by showing that changes in investment-wage sensitivities are more significant for firms that are more exposed to globalization, technological change, and declining unionization.