The minimum wage is a heavily debated economic policy tool, and discussions typically focus on its effects on low-wage workers. Some European countries, for example Germany, Spain, and Portugal, have set up a minimum wage by law while others, such as Austria, Denmark, and Italy, have no statutory minimum wage.
Filipe B. Caires’ research and his working paper ‘Internal Organization of Firms and Minimum Wage Spillovers’ reveal how increasing the minimum wage also leads to salary hikes for workers not directly targeted by the policy. This phenomenon is called the ‘minimum wage spillover’. More specifically, the work of the researcher at the EUI Department of Economics focuses on the factors within firms that amplify the spillover effect. Filipe’s research findings are relevant for policymakers interested in inequalities among workers, and, more generally, for people interested in understanding that policies often have indirect and unintended consequences.
In an interview, we asked Filipe to discuss his paper, its main findings, and implications for policymaking.
Your work focuses on the effects of the minimum wage on untargeted workers. Why is this research important? What new ground does it break?
Doctoral researchers at the EUI Department of Economics are always pushed by their professors to reflect not only on what we, as researchers, are focusing on, but also on why people should care about our research. I believe that my work is important for a number of reasons.
The minimum wage is one of the most widely used economic policy tools for raising low-wage workers' salaries. But there’s still progress to be made in understanding how it shapes the distribution of wages more broadly, and why.
The existence of spillover effects of the minimum wage has been documented by economics literature. Learning about their existence has been an important advance, but only a first step. These effects are not the intended outcomes of policy; rather, they emerge as responses from the wage-setting agents, in particular firms. Yet, we still know surprisingly little about the firm-level mechanisms that shape their reach and magnitude. Why do some firms adjust wages more than others? What explains this variation in spillover effects? And what can it reveal about how firms operate? My research aims to fill this gap.
To do so, my paper explores the effect of the increase of the minimum wage on the ‘wage distribution’, shifting the focus to the adjustments that happen inside the firm - the way salaries are set across different categories of workers, and how that relates to the incentive schemes in place.
My research studies the minimum wage as an example of a shock that raises the cost of labour across all firms. However, my findings have broader implications, as they establish that the responses of firms to any shock that affects relative pay between their workers may differ depending on the organisation of the firm and associated pay policies.
Why did you choose Portugal as your case study?
I focused on Portugal for three reasons.
First, the economic context is relevant. Most research in economics is focused on the United States, and the effects of the minimum wage and its spillovers are no different. But in this case, the evidence in the US is mostly proof-of-concept, since the US is not a minimum wage country (only around 1% of US workers are on the minimum wage). Portugal, on the other hand, is a country with persistently low wages – with around 20% of workers situated around minimum wage level – making it highly relevant for studying this policy. Additionally, Portugal is a country with relatively high labour protection laws, where it’s hard to fire workers. In this context, adjustments are more prone to occur through the wage margin, making this a suitable context to study effects on wages.
Second, there is variation in the minimum wage level over time in Portugal, crucial for my econometric analysis. In particular, I focus on the two increases (hikes) of the minimum wage in Portugal which occurred respectively in late 2014 and 2016. Importantly, both occurred after two consecutive years of no change, providing the ideal setting for my empirical study.
Third, the Portuguese government has collected very detailed, high-quality data on firms, establishments, workers, and their earnings since the late 1980s.
What are your key research findings? How does a firm's internal structure determine the spread of the minimum wage increase?
I analysed the topic both theoretically and empirically and developed a model that categorises firms, based on their internal pay structures and the incentive schemes they embody, into two groups: rigid firms and flexible firms.
In 'rigid firms', wages are tied strictly to job titles, meaning that all employees with the same job title receive the same salary. This happens, for example in big law firms or business consultancies, but also in the public sector (although it’s not part of my study). In this model, salary increases happen mostly through promotions. To encourage hard work, these firms or organisations rely on the difference in salaries across levels, with the promotion being the mechanism used to reward employees and incentivise their efforts.
On the other hand, 'flexible firms'—startups or less professionalised firms, for example—have a much more individualised wage-setting process. Salaries are bargained upon hiring and later depend on individual performance. This leads to much more leeway for workers to negotiate their wages.
After classifying firms into the two categories, I study the minimum wage hikes as a shock to both groups and trace in the data on how the effect affects salaries differently for workers not targeted by the policy in the two types of firms.
My research findings confirm that the minimum wage has implications that go far beyond the workers directly targeted by the policy. The effects of the policy shape wages of around half of the wage distribution. Moreover, I show for the first time that these effects depend heavily on the internal structure of the firm and whether its pay policies are rigid or flexible.
I found out that rigid firms, where the pay is strictly tied to job titles, significantly amplify the minimum wage spillover. In these firms, the effect is around 30% stronger. This is a very significant effect.
Let me clarify what happens in a rigid firm with an example. When the minimum wage for an entry-level job goes up, the salary increase that the recruited worker will receive upon promotion becomes smaller. This narrowed gap means the worker has less incentive to work hard to reach promotion, and this mechanism harms the firm's productivity. Therefore, to maintain motivation and encourage career progression, the rigid firm is incentivised to also increase the salaries of workers in the next level up, allowing to maintain the initial pay difference between the entry level salary and the promotion salary. This dynamic triggers salary increases for the upper levels that affect the pay scale, reaching workers up to the ‘median of wage distribution’, meaning the midpoint of all wages.
On the contrary, in a flexible firm, wages are negotiated individually, and wage increases depend on individual performance. If the government raises the minimum wage, my research does not rule out the existence of spillovers. However, this effect is not as broad and strong because flexible firms do not rely on the pay differences among grades to incentivise workers and can adjust levels individually.
In brief, my research findings demonstrate that the internal structure of firms must be considered to fully understand the effects of the minimum wage policy and its repercussions on the wider salary scale.
Based on your research findings, what should policymakers consider when deciding if to use the minimum wage as a policy tool? Can your model be applied also to other policies?
Policymakers must be clear about their policy goals. If they want to shrink inequalities, they must specify which inequalities they are trying to reduce. Second, they should be aware that introducing or raising the minimum wage has both direct and indirect consequences that, as my research shows, depend heavily on how firms are structured.
If the policymakers’ objective is to reduce inequalities between low-wage workers and mid-wage workers, then my research suggests the minimum wage might not be the most effective policy because, depending on the incentive structures operating within firms, its spillover effect might end up raising mid-wage salaries too. On the other hand, if the policymakers’ goal is to reduce the salary gap between low-wage workers and high-wage workers, then the minimum wage seems like an effective tool for doing so.
While my paper uses the minimum wage as an example of cost shock that affects companies, my model can be applied also to other external shocks. A few examples can be large migration flow or a significant technology shock, like the use of AI. These shocks may affect workers differently in different positions of the distribution, and my research suggests they may imply differential reactions across firms. My findings demonstrate that understanding a firm's organisational structure is key to tracing the unintended effects of many policies, not just of the minimum wage one.
You recently presented your research at various conferences, and you also received an award for your paper. Can you tell us more about these experiences?
The EUI Department of Economics strongly encourages us, researchers, to present our work at all stages of our doctoral research. We have numerous opportunities to present our research. This happens both within the department—to get feedback from supervisors, professors, and other researchers—as well as externally at workshops and conferences, when our research is robust enough to be presented to the outside world. These external events are invaluable occasions to receive peer feedback, to network, and to stay up –to date with global economic trends.
Over the summer, I discussed my paper at the conferences of the European Economic Association (EEA), the international scientific body that promotes the development of economic science throughout Europe, and at the conference of the Portuguese Economic Journal, an event that gathers both Portuguese economists and scholars working on topics related to the Portuguese economy.
Moreover, I presented my paper in London at the 2025 conference of the European Association of Young Economists (EAYE), which is an organisation that connects and supports early-career economists across Europe, often operating as the EEA’s branch dedicated to young economists. It was a big honour when my paper won the 'best paper award' at that conference. This is an important recognition of the value of my work, and it gives me motivation to continue with my research endeavours.
Filipe B. Caires is a doctoral researcher at the EUI Department of Economics. Filipe’s thesis is supervised by EUI Professor Andrea Ichino (supervisor) and former EUI Professor Thomas Crossley (co-supervisor).
Read the paper ‘Internal Organization of Firms and Minimum Wage Spillovers’ on SSRN.