DP16913 Optimal minimum wages

Author(s): Gabriel Ahlfeldt, Duncan Roth, Tobias Seidel
Publication Date: January 2022
Keyword(s): Applied general equilibrium model, employment, Germany, Inequality, minimum wage, minimum wage policy, Minimum Wages, monopsony, unemployment
JEL(s): J31, J58, R12
Programme Areas: Labour Economics, Public Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16913

We develop a quantitative spatial model with heterogeneous firms and a monopsonistic labour market to derive minimum wages that maximize employment or welfare. Quantifying the model for German micro regions, we find that the German minimum wage, set at 48% of the national mean wage, has increased aggregate worker welfare by about 2.1% at the cost or reducing employment by about 0.3%. The welfare-maximizing federal minimum wage, at 60% of the national mean wage, would increase aggregate worker welfare by 4%, but reduce employment by 5.6%. An employment-maximizing regional wage, set at 50\% of the regional mean wage, would achieve a similar aggregate welfare effect and increase employment by 1.1%.