Working Paper: CEPR ID: DP16913
Authors: Gabriel Ahlfeldt; Duncan Roth; Tobias Seidel
Abstract: We develop a quantitative spatial model with heterogeneous firms and a monopsonistic labour market to derive minimum wages that maximize employment or welfare. Quantifying the model for German micro regions, we find that the German minimum wage, set at 48% of the national mean wage, has increased aggregate worker welfare by about 2.1% at the cost or reducing employment by about 0.3%. The welfare-maximizing federal minimum wage, at 60% of the national mean wage, would increase aggregate worker welfare by 4%, but reduce employment by 5.6%. An employment-maximizing regional wage, set at 50\% of the regional mean wage, would achieve a similar aggregate welfare effect and increase employment by 1.1%.
Keywords: Applied General Equilibrium Model; Minimum Wage; Employment; Unemployment; Minimum Wage Policy; Minimum Wages; Inequality; Germany; Monopsony
JEL Codes: J31; J58; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| German minimum wage set at 48% of the national mean wage (J38) | increase in aggregate worker welfare by approximately 21% (J39) |
| German minimum wage set at 48% of the national mean wage (J38) | reduction of employment by about 0.3% (J63) |
| welfare-maximizing federal minimum wage at 60% of the national mean wage (J38) | increase in aggregate worker welfare by 4% (J89) |
| welfare-maximizing federal minimum wage at 60% of the national mean wage (J38) | reduction of employment by 5.6% (J63) |
| employment-maximizing regional wage set at 50% of the regional mean wage (J38) | similar aggregate welfare effect (D69) |
| employment-maximizing regional wage set at 50% of the regional mean wage (J38) | increase in employment by 11% (J23) |
| ambitious federal minimum wages in the range of 60-70% of the national median wage (J38) | potential welfare increases with significant job losses (J68) |
| moderate regional minimum wages (J38) | similar welfare gains alongside job creation (J68) |