Minimum Wages for Ronald McDonald Monopsonies A Theory of Monopsonistic Competition

Recent empirical work on the e ects of minimum wages has called into question the conventional wisdom that minimum wages invariably reduce employment. We develop a model of monopsonistic competition with free entry to analyze the e ects of minimum wages, and our predictions t the empirical results closely. Under monopsonistic competition, we nd that a rise in the minimum wage a) raises employment per rm, b) causes rm exit, c) may increase or reduce industry employment. Minimum wages increase welfare if they raise industry employment, but welfare e ects are ambiguous if employment falls. Industry price and employment are inversely related if the product market is competitive. However, if rms have product market power, a minimum wage which raises industry employment can also increase prices. JEL classi cation numbers: J23, J42, L13