Minimum Wage and Employer Variety

Abstract

Exploiting minimum wage variation within multi-state commuting zones, we document a negative relationship between minimum wages and establishment counts in the United States. To explain this finding, we construct a heterogeneous-firm model with a monopsonistic labor market and endogenous firm variety. The decentralized equilibrium underprovides the mass of firms compared to the outcome achieved by a welfare-maximizing planner. A binding minimum wage further reduces the mass of firms, exacerbating the distortion. Workers value employer variety, and thus, by reducing firm variety the minimum wage reduces workers' welfare even if the average wage increases. Based on estimated elasticities, our model predicts that a 10 percent minimum wage hike reduces workers' welfare by 1:87 percent.

Keywords: minimum wage, number for firms, love of employer variety

JEL Classification: J380, J420