Minimum Wages, Efficiency and Welfare

86 Pages Posted: 21 Jan 2022

See all articles by David W. Berger

David W. Berger

Duke University, Fuqua School of Business-Economics Group

Kyle Herkenhoff

University of Minnesota - Minneapolis

Simon Mongey

University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: January 20, 2022

Abstract

It has long been argued that a minimum wage could alleviate efficiency losses from monopsony power. In a general equilibrium framework that quantitatively replicates results from recent empirical studies, we find higher minimum wages can improve welfare, but most welfare gains stem from redistribution rather than efficiency. Our model features oligopsonistic labor markets with heterogeneous workers and firms and yields analytical expressions that characterize the mechanisms by which minimum wages can improve efficiency, and how these deteriorate at higher minimum wages. We provide a method to separate welfare gains into two channels: efficiency and redistribution. Under both channels and Utilitarian social welfare weights the optimal minimum wage is $15, but alternative weights can rationalize anything from $0 to $31. Under only the efficiency channel, the optimal minimum wage is narrowly around $8, robust to social welfare weights, and generates small welfare gains that recover only 2 percent of the efficiency losses from monopsony power.

JEL Classification: E2,J2,J42

Suggested Citation

Berger, David W. and Herkenhoff, Kyle and Mongey, Simon, Minimum Wages, Efficiency and Welfare (January 20, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-10, Available at SSRN: https://ssrn.com/abstract=4013843 or http://dx.doi.org/10.2139/ssrn.4013843

David W. Berger

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States

Kyle Herkenhoff

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

Simon Mongey (Contact Author)

University of Chicago ( email )

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