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Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms


Leif Danziger


Ben-Gurion University of the Negev - Department of Economics; Institute for the Study of Labor (IZA)
August 2009

CESifo Working Paper Series No. 2740

Abstract:     
The minimum wage rate has been introduced in many countries as a means of alleviating the poverty of the working poor. This paper shows, however, that an imperfectly enforced minimum wage rate causes small firms to face an upward-sloping labor supply schedule. Since this turns these firms into endogenous monopsonists, the minimum wage rate has the perverse effect of reducing employment in small firms as well as what these firms offer their workers. Thus, if there are only small firms, the minimum wage rate makes all workers that would be employed in the absence of a minimum wage rate worse off.

Number of Pages in PDF File: 25

Keywords: endogenous monopsony, minimum wage, noncompliance, small firms

JEL Classification: J38

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Date posted: August 12, 2009  

Suggested Citation

Danziger, Leif, Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms (August 2009). CESifo Working Paper Series No. 2740. Available at SSRN: http://ssrn.com/abstract=1447224

Contact Information

Leif Danziger (Contact Author)
Ben-Gurion University of the Negev - Department of Economics ( email )
Beer-Sheva 84105
Israel
8-6472295 (Phone)
8-6472941 (Fax)
HOME PAGE: http://www.econ.bgu.ac.il/facultym/danziger/main.htm
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
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