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Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition

Author

Listed:
  • V. Bhaskar

    (University of Essex)

  • Ted To

    (University of Warwick)

Abstract

Recent empirical work on the effects of minimum wages has called into question the conventional wisdom that minimum wages invariably reduce employment. We develop a model of \emph{monopsonistic competition} with \emph{free entry} to analyze the effects of minimum wages, and our predictions fit the empirical results closely. Under monopsonistic competition, we find that a rise in the minimum wage a) raises employment per firm, b) causes firm exit, c) may increase or reduce industry employment. Minimum wages increase welfare if they raise industry employment, but welfare effects are ambiguous if employment falls. Industry price and employment are inversely related if the product market is competitive. However, if firms have product market power, a minimum wage which raises industry employment can also increase prices.

Suggested Citation

  • V. Bhaskar & Ted To, 1996. "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition," Labor and Demography 9603001, University Library of Munich, Germany, revised 06 Aug 1998.
    • Handle: RePEc:wpa:wuwpla:9603001
    Note: Type of Document - LaTex generated DVI file; to print on Any; pages: 30 ; figures: included
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    References listed on IDEAS

    as
    1. Lawrence Katz & Alan Krueger, 1992. "The Effect of the Minimum Wage on the Fast Food Industry," Working Papers 678, Princeton University, Department of Economics, Industrial Relations Section..
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    labor theory; minimum wage; monopsony; oligopsony; monopsonistic competition.;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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