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The effects of Minimum Wage in the presence of Monopsonic power in Latin America: A study case for Mexico

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  • Rodriguez, Francisco Javier Valverde

Abstract

This dissertation studies how minimum wage changes affect labor market outcomes (employment and wages) when taking into account the effect of monopsonic power from employers. We explore the case of a labor market with high levels of informality and wage inequality such as Mexico. We use data from the Mexican Economic Census and employment surveys to estimate a Herfindahl-Hirschman concentration index for urban labor markets. This measure is used to evaluate the effect of the change in minimum wage policy from the government, which started increasing the minimum wage significantly from 2016 onward. We use the concentration index in several regressions with interaction between minimum wage and the index, including lineal and quantile regressions. Our main findings are that the minimum wage has a small but positive marginal effects on labor market outputs, and these effects increase with market concentration. Spillover effects range from 0.01 to 0.14\% overall, and are bigger for informal than for formal workers. Employment effects range from -0.42 to -0.74\%. We consider the monopsony theory explains these findings. Additionally, the spillover effects are greater for the lowest percentiles of the wage distribution, and disappear around the 10th percentile. This is consistent with previous evidence about minimum wage impacts. The results are robust for alternative definitions of market concentration and for a placebo test. These results provide evidence on the effectiveness of minimum wage in reducing poverty and wage inequality, and the necessity of pro-worker regulation to reduce the market power of firms.

Suggested Citation

  • Rodriguez, Francisco Javier Valverde, 2023. "The effects of Minimum Wage in the presence of Monopsonic power in Latin America: A study case for Mexico," SocArXiv 5x7uk, Center for Open Science.
    • Handle: RePEc:osf:socarx:5x7uk
    DOI: 10.31219/osf.io/5x7uk
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