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

22 Pages Posted: 4 Aug 2009

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Leif Danziger

Ben-Gurion University of the Negev - Department of Economics; IZA Institute of Labor Economics

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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.

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

JEL Classification: J38

Suggested Citation

Danziger, Leif, Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms. IZA Discussion Paper No. 4320, Available at SSRN: https://ssrn.com/abstract=1442615

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