Abstract:
As U.S. income inequality increased, labor-intensive production became more concentrated into lower-wage regions. While economically profitable, the higher concentration can lead to more volatile firm outcomes. Using federally-mandated minimum wage increases as a quasi-natural experiment, we show that the increase in the federal minimum wage in states where the state minimum is bound to the federal mandate tempers the concentration. As a result, the profit volatilities of downstream firms in treated states decrease. We find that a one dollar increase in the federal minimum wage leads to a 3.63 percentage point decrease in production concentration in bound states, which is then associated with a 24.4% decrease in profit volatility of customer firms in those states. Our findings highlight the volatility spillover cost born by firms dependent on geographically concentrated production.