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Endogenous monopsony and the perverse effect of the minimum wage in small firms

  • Danziger, Leif

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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Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 17 (2010)
Issue (Month): 1 (January)
Pages: 224-229

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Handle: RePEc:eee:labeco:v:17:y:2010:i:1:p:224-229
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