This paper explores the effect of minimum wages on firms incentives to provide training for their employees. Our point of departure is a well-known paper by Acemoglu (1997), which argues that a more compressed structure of wages - such as is found in many European countries - gives firms more incentive to train. Acemoglu and Pischke (1999, 2003) view minimum wages as a source of wage compression and show that a rise in the minimum wage stimulates firm training. This result seems simple and compelling: When a minimum wage constraint is binding, a rise in training will increase the productivity of a firm’s workforce, but it will not lead to a rise in the wage. Thus training is more profitable under a minimum wage constraint than in the absence of this constraint, for in the latter case the rise in productivity will lead to a wage hike. It is on this account that minimum wages are conducive to training.
This paper considers another potentially important channel whereby minimum wages affect firm training: A rise in the minimum wage reduces the profitability of an employee, thereby making it more likely that the firm will fire the employee. In that case, however, the firm cannot appropriate the gains from training, and thus the firm will provide less of this training.
This paper is related to some recurrent concerns in the economic and financial literatures. In the former one, it is linked to the notion of contagion between international markets, and in particular the propagation of financial crises between neighbouring countries and their repercussion on economic activity. Such concern has recently gained increased interest in view of the emerging markets crises in the nineties. In the latter one, it is linked to the notions of risk and portfolio diversification. In recent years, risk management methods such as VaR or the enlargement of financial integration to a broader scope of countries have renewed the interest in these topics.
Emerging markets have been a fertile ground for economic and financial market research in recent years. One argument behind the interest is that emerging markets provide great out-of-sample tests of existing models. Studies using US data show that there is a value premium: value stocks outperform growth stocks (Famaand French [1992,1996]and Lakonishok, Shleiferand Vishny[1994]).
