Monopsony Power, Offshoring, and a European Minimum Wage

Hartmut Egger, Udo Kreickemeier and Jens Wrona

No 10920, CESifo Working Paper Series from CESifo

Abstract: This paper sets up a two-country model of offshoring with monopolistically competitive product and monopsonistically competitive labour markets. In our model, an incentive for offshoring exists even between symmetric countries, because shifting part of the production abroad reduces local labour demand and allows firms to more strongly execute their monopsonistic labour market power. However, offshoring between symmetric countries has negative welfare effects and therefore calls for policy intervention. In this context, we put forward the role of a common minimum wage and show that the introduction of a moderate minimum wage increases offshoring and reduces welfare. In contrast, a sizable minimum wage reduces offshoring and increases welfare. Beyond that, we also show that a sufficiently high common minimum wage cannot only eliminate offshoring but also inefficiencies in the resource allocation due to monopsonistic labour market distortions in closed economies.

Keywords: offshoring; minimum wage; welfare effects (search for similar items in EconPapers)
JEL-codes: F12 F16 F23 J42 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-com, nep-int, nep-inv and nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10920

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