Effect of Minimum Wage on Firms' Innovation Investment: Evidence From Korea

ABSTRACT This study analyzes how a minimum wage increase affects firms' innovation investment. Unlike previous studies that focus on the Chinese context, this study based on data from Korea finds a negative relationship between the minimum wage and innovation in small firms, which are directly affected by minimum wage increases. This study reveals for the first time that a change in innovation investment by general firms, which pay labour costs according to wages determined in the labour market, is due to a change in the price of intermediate goods resulting from the subcontracting relationship between small and general firms, rather than a direct effect of the minimum wage. The calibrated results obtained using data from Korea show that a 16.4% increase in the minimum wage is associated with 1.09% and 0.25% decreases in innovation in small firms and total innovation investment, respectively.