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Endogenous Monopsony and the Perverse Effect of the Minimum ...

Endogenous Monopsony and the Perverse Effect of the Minimum ...

Endogenous Monopsony and the Perverse Effect of the Minimum

Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms Leif Danziger Department of Economics, Ben-Gurion University Beer-Sheva 84105, Israel Abstract The minimum wage rate has been introduced in many countries as a means of alleviating the poverty of the working poor in an otherwise competitive labor market. However, this paper shows that an imperfectly enforced minimum wage rate causes small firms to face an upward- sloping labor supply schedule. Since this turns small firms into endogenous monopsonists, the minimum wage rate has the perverse effect of reducing the employment in small firms as well as what these firms offer their workers. Indeed, if there are only small firms, the minimum wage rate makes all workers worse off. JEL Classification: J38 Keywords: Endogenous monopsony; minimum wage; small firms

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