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The concentration channel of the minimum wage

Author

Listed:
  • Salvatore Lo Bello

    (Bank of Italy)

  • Lorenzo Pesaresi

    (Bank of Italy)

Abstract

We study the equilibrium and welfare effects of the minimum wage when product market power is endogenous and varies with the degree of market competition. A higher minimum wage reallocates workers from small to large firms. Large firms gain market share and increase their price markups. We call this mechanism 'the concentration channel' of the minimum wage. We develop an equilibrium model with frictional labour markets and oligopolistic product markets. We estimate the model using Italian administrative data, replicating the structure of detailed labour and product markets. We find that both the aggregate labour share and consumption are hump-shaped in the minimum wage, due to the opposing responses of price markups and wage markdowns. The optimal minimum wage directly affects 10 per cent of workers. Endogenous product market power lowers the optimal minimum wage. We also provide empirical evidence supporting the concentration channel.

Suggested Citation

  • Salvatore Lo Bello & Lorenzo Pesaresi, 2026. "The concentration channel of the minimum wage," Temi di discussione (Economic working papers) 1547, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1547_26
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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