Endogenous monopsony and the perverse effect of the minimum wage in small firms |
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| Authors: | Leif Danziger |
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| Institution: | 1. Faculty of Economics, Kyoto University, Yoshida-honmachi, Sakyo-ku, Kyoto 606-8501, Japan;2. School of Economics, Kwansei Gakuin University, Nishinomiya 662-8501, Japan;1. VU University Amsterdam, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands;2. Tinbergen Institute (TIA), Gustav Mahlerplein 117, 1082 MS Amsterdam, The Netherlands;3. IZA, Schaumburg-Lippe-Strasse 5-9, 53113 Bonn, Germany;4. Keio Economic Observatory, Keio University, 2-15-45 Mita, Minato-ku 108-8345, Tokyo, Japan;5. RIETI, 1-3-1, Kasumigaseki, Chiyoda-ku, 100-8901 Tokyo, Japan;6. CREST (ParisTech-ENSAE), 15 Boulevard Gabriel Péri, 92245 Malakoff Cedex, France;7. UNU-MERIT (Maastricht University), Keizer Karelplein 19, 6211 TC Maastricht, The Netherlands;8. NBER, 1050 Massachusetts Ave., Cambridge, MA, USA;1. Université du Québec à Montréal, Canada;2. Paris School of Economics (University of Paris 1), France;3. Shanghai University of International Business and Economics, China |
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| Abstract: | 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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