Working Paper: NBER ID: w29662
Authors: David W. Berger; Kyle F. Herkenhoff; Simon Mongey
Abstract: It has long been argued that a minimum wage could alleviate efficiency losses from monopsony power. In a general equilibrium framework that quantitatively replicates results from recent empirical studies, we find higher minimum wages can improve welfare, but most welfare gains stem from redistribution rather than efficiency. Our model features oligopsonistic labor markets with heterogeneous workers and firms and yields analytical expressions that characterize the mechanisms by which minimum wages can improve efficiency, and how these deteriorate at higher minimum wages. We provide a method to separate welfare gains into two channels: efficiency and redistribution. Under both channels and Utilitarian social welfare weights the optimal minimum wage is $15, but alternative weights can rationalize anything from $0 to $31. Under only the efficiency channel, the optimal minimum wage is narrowly around $8, robust to social welfare weights, and generates small welfare gains that recover only 2 percent of the efficiency losses from monopsony power.
Keywords: Minimum Wage; Efficiency; Welfare; Redistribution; Labor Markets
JEL Codes: E2; J2; J4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal minimum wage under utilitarian social welfare weights (D69) | $15 (Y20) |
| Optimal minimum wage under efficiency channel alone (H21) | $8 (Y60) |
| Higher minimum wages (J38) | Increase in welfare (I38) |
| Higher minimum wages (J38) | Redistribution of economic output from business owners to low-income workers (D33) |
| Higher minimum wages (J38) | Limited efficiency gains due to market power (D43) |
| Firms with market power increase wages (J39) | Limited efficiency gains (D61) |
| Marginal revenue product of labor is relatively flat (J29) | Limited efficiency gains (D61) |
| Spillover effects from high productivity firms are minimal (D21) | Limited efficiency gains (D61) |