Minimum Wages, Employment and Monopsonistic Competition

V Bhaskar and Ted To

Economics Discussion Papers from University of Essex, Department of Economics

Abstract: We set out a model of monopsonistic competition, where each employer competes equally with every other employer. The employment effects of minimum wages depend on the degree of distortion in the labor market. If fixed costs per firm are high then the labor market is relatively non-competitive and minimum wages increase employment. Conversely, low fixed costs make for a more competitive labor market where minimum wages reduce employment. This contrasts with the results of a Salop style model with localized employer competition where a minimum wage unambiguously raises employment. We also find that the welfare effect of a small minimum wage is unambiguously positive.

Keywords: monopsonistic competition; labor theory; minimum wages; monopsony (search for similar items in EconPapers)
Date: 2002
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