Discussion paper

DP16913 Optimal minimum wages

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%.


Ahlfeldt, G, D Roth and T Seidel (2022), ‘DP16913 Optimal minimum wages‘, CEPR Discussion Paper No. 16913. CEPR Press, Paris & London. https://cepr.org/publications/dp16913