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

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

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Danziger, Leif () (Ben Gurion University)

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Leif Danziger

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4320.

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Date of creation: Jul 2009
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Publication status: forthcoming in: Labour Economics
Handle: RePEc:iza:izadps:dp4320

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

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-08-08 (All new papers)
NEP-LAB-2009-08-08 (Labour Economics)

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Other versions:
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Other versions:
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