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Optimal minimum wages

Author

Listed:
  • Ahlfeldt, Gabriel
  • Roth, Duncan
  • Seidel, Tobias

Abstract

We develop a quantitative spatial model with heterogeneous firms and a monopsonistic labour market to derive minimum wages that maximize employment or welfare. Quantifying the model for German micro regions, we find that the German minimum wage, set at 48% of the national mean wage, has increased aggregate worker welfare by about 2.1% at the cost or reducing employment by about 0.3%. The welfare-maximizing federal minimum wage, at 60% of the national mean wage, would increase aggregate worker welfare by 4%, but reduce employment by 5.6%. An employment-maximizing regional wage, set at 50\% of the regional mean wage, would achieve a similar aggregate welfare effect and increase employment by 1.1%.

Suggested Citation

  • Ahlfeldt, Gabriel & Roth, Duncan & Seidel, Tobias, 2022. "Optimal minimum wages," CEPR Discussion Papers 16913, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16913
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    1. is not listed on IDEAS
    2. Gabriele Borg & Diego Gentile Passaro & Santiago Hermo, 2022. "From Workplace to Residence: The Spillover Effects of Minimum Wage Policies on Local Housing Markets," Papers 2208.01791, arXiv.org, revised Aug 2024.
    3. Garcia-Louzao, Jose & Tarasonis, Linas, 2023. "Wage and Employment Impact of Minimum Wage: Evidence from Lithuania," Journal of Comparative Economics, Elsevier, vol. 51(2), pages 592-609.
    4. Rui Pan & Dao‐Zhi Zeng, 2024. "Goods market desirability of minimum wages," Economica, London School of Economics and Political Science, vol. 91(364), pages 1255-1290, October.
    5. Caliendo, Marco & Olthaus, Rebecca & Pestel, Nico, 2025. "Long-term employment effects of the minimum wage in Germany: New data and estimators," Labour Economics, Elsevier, vol. 92(C).
    6. Breda, Thomas & Haywood, Luke & Wang, Haomin, 2024. "Equilibrium effects of payroll tax reductions and optimal policy design," Labour Economics, Elsevier, vol. 91(C).

    More about this item

    Keywords

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    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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