Optimal minimum wages

Gabriel Ahlfeldt, Duncan Roth and Tobias Seidel

No 16913, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a quantitative spatial model with heterogeneous firms and a monopsonistic labour market to derive minimum wages that maximize employment or welfare. Quantifying the model for German micro regions, we find that the German minimum wage, set at 48% of the national mean wage, has increased aggregate worker welfare by about 2.1% at the cost or reducing employment by about 0.3%. The welfare-maximizing federal minimum wage, at 60% of the national mean wage, would increase aggregate worker welfare by 4%, but reduce employment by 5.6%. An employment-maximizing regional wage, set at 50\% of the regional mean wage, would achieve a similar aggregate welfare effect and increase employment by 1.1%.

Keywords: Applied general equilibrium model; Minimum wage; Employment; Unemployment; Minimum wage policy; Minimum wages; Inequality; Germany; Monopsony (search for similar items in EconPapers)
JEL-codes: J31 J58 R12 (search for similar items in EconPapers)
Date: 2022-01
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Working Paper: Optimal minimum wages (2022)
Working Paper: Optimal minimum wages (2022)
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