The concentration channel of the minimum wage

Salvatore Lo Bello () and Lorenzo Pesaresi ()
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Salvatore Lo Bello: Bank of Italy
Lorenzo Pesaresi: Bank of Italy

No 1547, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We study the equilibrium and welfare effects of the minimum wage when product market power is endogenous and varies with the degree of market competition. A higher minimum wage reallocates workers from small to large firms. Large firms gain market share and increase their price markups. We call this mechanism 'the concentration channel' of the minimum wage. We develop an equilibrium model with frictional labour markets and oligopolistic product markets. We estimate the model using Italian administrative data, replicating the structure of detailed labour and product markets. We find that both the aggregate labour share and consumption are hump-shaped in the minimum wage, due to the opposing responses of price markups and wage markdowns. The optimal minimum wage directly affects 10 per cent of workers. Endogenous product market power lowers the optimal minimum wage. We also provide empirical evidence supporting the concentration channel.

Keywords: minimum wage; wage distribution; worker and firm heterogeneity; equilibrium search model; reallocation; oligopolistic competition; endogenous markups (search for similar items in EconPapers)
JEL-codes: D43 E24 E25 E64 J31 J38 J42 J64 (search for similar items in EconPapers)
Date: 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1547_26

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