This paper analyzes the firm dynamics of adjustment to higher minimum wages using Costa Rica’s occupation-specific minimum wage setting. To this purpose, I assemble rich administrative data covering the universe of workers and firms in the 2006-2017 period to construct firm-level measures of compliance cost, and estimate the impact of differential exposure to the minimum wage on firm outcomes at several year horizons. The analysis yields two important results: First, minimum wages induce firms to increase their labor shares, but with a negative and persistent impact on their profitability. The positive effect on the labor shares moderates as firms reduce their employment levels and expand their capital stocks. Second, raising minimum wages has a detrimental impact on aggregate employment dynamics by reducing firm entry, with an estimated adverse effect on employment of 0.8 percent due to the missing entrants associated with the policy.

This paper provides new evidence on the minimum wage impact on employment flows, using Costa Rica’s distinctive occupation-based setting. I use administrative data from 2006-2017 to estimate firm-level minimum wage exposure and compute dynamic responses to the policy. Results indicate that firms increase their pay premiums in compliance with the policy. However, higher minimum wages have a negative and lasting effect on hiring rates and induce a temporary increase in separation rates. Job-to-job separation rates, on the contrary, decline after a minimum wage increase. I propose a wage-posting model with endogenous job creation to rationalize the results.

This paper studies the capital-labor substitution effects associated with higher minimum wages, using Costa Rica’s rich administrative data. I exploit this country’s occupation-based setting to estimate average and sector-specific elasticities of substitution between capital and labor. I find elasticities consistently below one, suggesting that the substitution away from labor towards capital is not large enough to reduce the labor share after a minimum wage increase. Specifically, I compute an elasticity of 0.59 for all firms, and significant heterogeneity across representative sectors, stressing differences in the production technologies across industries. The estimated value is higher in manufacturing (0.81) and tradable sectors (0.76) but smaller in non-tradable sectors (0.46).