Endogenous monopsony and the perverse effect of the minimum wage in small firms

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16 Scopus citations

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.

Original languageEnglish
Pages (from-to)224-229
Number of pages6
JournalLabour Economics
Volume17
Issue number1
DOIs
StatePublished - 1 Jan 2010

Keywords

  • Endogenous monopsony
  • Minimum wage
  • Noncompliance
  • Small firms

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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