Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition

V Bhaskar and Ted To

Economic Journal, 1999, vol. 109, issue 455, pages 190-203

Abstract: Recent empirical work on the effects of minimum wages has called into question the conventional wisdom that minimum wages invariably reduce employment. The authors develop a model of monopsonistic competition with free entry to analyze the effects of minimum wages and their predictions fit the empirical results closely. Under monopsonistic competition, they find that a rise in the minimum wage raises employment per firm, causes firm exit, and may increase or reduce industry employment. Minimum wages increase welfare if they raise industry employment but welfare effects are ambiguous if employment falls.

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