2025/01/01 by David Berger, Kyle Herkenhoff, Simon Mongey · 1 voice
Economics, Econometrics and Finance · Health Professions · #Employment and Welfare Studies #Fiscal Policy and Economic Growth #Labor market dynamics and wage inequality
paper · doi:10.3982/ecta21466
openalex publication_date 2025/01/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/21
Many argue that minimum wages can prevent efficiency losses from monopsony power. We assess this argument in a general equilibrium model of oligopsonistic labor markets with heterogeneous workers and firms. We decompose welfare gains into an efficiency component that captures reductions in monopsony power and a redistributive component that captures the way minimum wages shift resources across people. The minimum wage that maximizes the efficiency component of welfare lies below 8.00 and yields gains worth less than 0.2% of lifetime consumption. When we add back in Utilitarian redistributive motives, the optimal minimum wage is 11 and redistribution accounts for 102.5% of the resulting welfare gains, implying offsetting efficiency losses of −2.5%. The reason a minimum wage struggles to deliver efficiency gains is that with realistic firm productivity dispersion, a minimum wage that eliminates monopsony power at one firm causes severe rationing at another. These results hold under an EITC and progressive labor income taxes calibrated to the U.S. economy.