Employment Differentiation, Minimum Wages and Firm Exit

21 Pages Posted: 26 Mar 2021

Date Written: March 24, 2021


The economic literature acknowledges that labor markets can often be described by monopsonistic competition. In such a structure, employers have market power and in the long run, zero profits due to the free entry and exit of firms. This article builds a model to analyze the role of minimum wages when employment is differentiated. It shows that first best and second best minimum wages can increase employment and improve efficiency by reducing market power, at the expense of having firm exit, higher concentration among employers, and less employment variety. As such, this article can provide insights on the higher firm exit rates observed among new, small and lower productivity firms.

Keywords: Employment differentiation, residual supply, firm exit, and minimum wage

JEL Classification: D21, J21, J31

Suggested Citation

Vallejo, Hernan, Employment Differentiation, Minimum Wages and Firm Exit (March 24, 2021). Documento CEDE No. 14, Available at SSRN: https://ssrn.com/abstract=3811780 or http://dx.doi.org/10.2139/ssrn.3811780

Hernan Vallejo (Contact Author)

Universidad de los Andes ( email )

Carrera 1a No. 18A-10
57-1-3394949 (Phone)
57-1-3324492 (Fax)

HOME PAGE: http://economia.uniandes.edu.co/vallejo

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