Econometrica

Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jan, 2025, Volume 93, Issue 1

Minimum Wages, Efficiency, and Welfare

https://doi.org/10.3982/ECTA21466
p. 265-301

David Berger|Kyle Herkenhoff|Simon Mongey

Many argue that minimum wages can prevent efficiency losses from monopsony power. We assess this argument in a general equilibrium model of oligopsonistic labor markets with heterogeneous workers and firms. We decompose welfare gains into an efficiency component that captures reductions in monopsony power and a redistributive component that captures the way minimum wages shift resources across people. The minimum wage that maximizes the efficiency component of welfare lies below $8.00 and yields gains worth less than 0.2% of lifetime consumption. When we add back in Utilitarian redistributive motives, the optimal minimum wage is $11 and redistribution accounts for 102.5% of the resulting welfare gains, implying offsetting efficiency losses of −2.5%. The reason a minimum wage struggles to deliver efficiency gains is that with realistic firm productivity dispersion, a minimum wage that eliminates monopsony power at one firm causes severe rationing at another. These results hold under an EITC and progressive labor income taxes calibrated to the U.S. economy.


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Supplemental Material

Supplement to "Minimum Wages, Efficiency and Welfare"

David Berger, Kyle Herkenhoff, and Simon Mongey

Section A provides model parameters and moments as well as the wage distribution in the model and data. Section B provides details of the Validation exercises described in Section 7. Section C provides Robustness exercises described in Section 7. Section D contains Proofs for a simplified monopsony and oligopsony economy that are referred to in Section 3, and an even simpler pedagogical example. This is the Homogeneous worker economy. The Additional Materials to Minimum Wages, Efficiency and Welfare (Berger, Herkenhoff, and Mongey, 2024) is available on the authors’ websites, and follows this Supplemental (Online) Appendix, and provides (i) details on the calibration of φ, (i) additional figures and tables, (ii) derivations of the equilibrium conditions for the Heterogeneous worker economy,
and any other equations in the main text, (iii) algorithm for solving the economy.

Supplement to "Minimum Wages, Efficiency and Welfare"

David Berger, Kyle Herkenhoff, and Simon Mongey

The replication package for this paper is available at https://doi.org/10.5281/zenodo.13742497. The Journal checked the data and codes included in the package for their ability to reproduce the results in the paper and approved online appendices.

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