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Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms

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Author Info
Leif Danziger ()

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Abstract

The minimum wage rate has been introduced in many countries as a means of alleviating the poverty of the working poor. This paper shows, however, that an imperfectly enforced minimum wage rate causes small firms to face an upward-sloping labor supply schedule. Since this turns these firms into endogenous monopsonists, the minimum wage rate has the perverse effect of reducing employment in small firms as well as what these firms offer their workers. Thus, if there are only small firms, the minimum wage rate makes all workers that would be employed in the absence of a minimum wage rate worse off.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2740.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2740

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Related research
Keywords: endogenous monopsony; minimum wage; noncompliance; small firms;

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Find related papers by JEL classification:
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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  30. Nadia Fiorino & Roberto Ricciuti, 2009. "Interest Groups and Government Spending in Italy, 1876-1913," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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