Minimum Wage Competition

24 Pages Posted: 6 Dec 2018 Last revised: 14 Sep 2019

See all articles by Koichi Fukumura

Koichi Fukumura

University of Tokyo, Faculty of Economics

Atsushi Yamagishi

Hitotsubashi University - Institute of Economic Research

Date Written: September 13, 2019

Abstract

This paper shows that increased factor mobility might cause the ``race to the top'' in setting the minimum wage, contrary to what other studies have suggested. By focusing on geographical labor mobility, we propose a minimum wage competition model and show that minimum wage rates may increase after a significant increase in mobility because it allows each government to less internalize the negative effect of the minimum wage increase. This result is consistent with the data on European countries from the period of the EU's massive enlargement. We also show that minimum wage rates respond positively to increased geographical mobility when (i) mobile workers face significantly worse labor market conditions, (ii) the concerns of economic efficiency are small, and (iii) the share of mobile workers is relatively small. The model also yields a normative implication that coordination in setting minimum wages is needed to achieve a desirable outcome.

Keywords: minimum wage; geographical mobility; intergovernmental competition; immigrants; race to the top

JEL Classification: H23, H77, I38, J61, J68

Suggested Citation

Fukumura, Koichi and Yamagishi, Atsushi, Minimum Wage Competition (September 13, 2019). Available at SSRN: https://ssrn.com/abstract=3269097 or http://dx.doi.org/10.2139/ssrn.3269097

Koichi Fukumura

University of Tokyo, Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

Atsushi Yamagishi (Contact Author)

Hitotsubashi University - Institute of Economic Research ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8306
Japan

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