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Employment Differentiation, Minimum Wages and Firm Exit

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  • Hernán Vallejo

Abstract

The economic literature acknowledges that labor markets can often be described by monopsonistic competition. In such a structure, employers have market power and in the long run, zero profits due to the free entry and exit of firms. This article builds a model to analyze the role of minimum wages when employment is differentiated. It shows that first best and second best minimum wages can increase employment and improve efficiency by reducing market power, at the expense of having firm exit, higher concentration among employers, and less employment variety. As such, this article can provide insights on the higher firm exit rates observed among new, small and lower productivity firms.

Suggested Citation

  • Hernán Vallejo, 2021. "Employment Differentiation, Minimum Wages and Firm Exit," Documentos CEDE 019141, Universidad de los Andes – Facultad de Economía – CEDE.
  • Handle: RePEc:col:000089:019141
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    File URL: https://repositorio.uniandes.edu.co/bitstream/handle/1992/49604/dcede2021-14.pdf
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    References listed on IDEAS

    as
    1. Bhaskar, V & To, Ted, 1999. "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition," Economic Journal, Royal Economic Society, vol. 109(455), pages 190-203, April.
    2. Bossavie,Laurent Loic Yves & Acar,Aysenur & Makovec,Mattia, 2019. "Do Firms Exit the Formal Economy after a Minimum Wage Hike ?," Policy Research Working Paper Series 8749, The World Bank.
    3. Ronald Bachmann & Hanna Frings, 2017. "Monopsonistic competition, low-wage labour markets, and minimum wages – An empirical analysis," Applied Economics, Taylor & Francis Journals, vol. 49(51), pages 5268-5286, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Employment differentiation; residual supply; firm exit; and minimum wage.;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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