Equilibrium Effects of the Minimum Wage: The Role of Product Market Powe r
Abstract:
We study the role of p roduct market power in the equilibrium effects of the minimum wage. Higher minimum wages are known to induce workers' reallocation from small to large r firms. If firms set prices strategically, they optimally respond to large r market shares by raising their markups. We call this novel mechanism conc entration channel of the minimum wage. We show that product market power ca n overturn the commonly-held view that higher minimum wages boost the aggre gate labor share. On the one hand, the minimum wage pushes the labor share up by compressing firms' monopsony power on the labor market. On the other hand, the concentration channel depresses the labor share by fuelling firms ' monopoly power on the product market. Consistently with our theory, we do cument on Italian balance-sheet data that the firm-level labor share respon se to higher sectoral minimum wages is decreasing in product market concent ration. To quantify the aggregate labor share response, we construct a nove l structural model embedding frictional labor markets and oligopolistically -competitive product markets. We estimate the model on Italian social secur ity data replicating key labor market statistics for different worker types and the detailed structure of sectoral product markets. We find that the l abor share is hump-shaped in the level of minimum wage with a peak around t he median wage. Our results stress the importance of factoring in product m arket power for a correct evaluation of minimum wage reforms.
DTSTAMP:20260531T091214Z DTSTART:20230519T010000Z DTEND:20230519T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR