When Competition and Labor Market Policy Collide: The Case of the Minimum Wage

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Abstract:

Policymakers and competition authorities are concerned about the negative effects that labor market power has on workers and the efficient functioning of the labor market. The minimum wage has the potential to curb firms’ power, raising employment and wages (Robinson 1933). However, how does using the minimum wage to mitigate firms’ labor market power impact social welfare, when these firms differ in labor productivity and degree of product market power? Do the interests of consumers and workers align or conflict? We answer these questions in the context of sector-specific minimum wages. In our framework, raising the minimum wage affects labor and product market equilibrium. First, it may either increase, reduce or have no effect at all on the marginal cost of a given firm, depending on its level relative to the marginal revenue product of labor. Second, the minimum wage influences the strategic pricing decisions of competing firms in the product market, even when the own-cost effect is null. We extend a model of supply and demand in an oligopolistic industry with rich consumer preferences and endogenous marginal costs, to incorporate firms’ production, employment and wages. We estimate the model using a unique dataset from the beer industry in Uruguay, where firms of different sizes producing imperfect substitutes compete. We find that the minimum wage that minimizes employers’ power and enhances labor market efficiency also reduces consumer surplus and competition in the product market. The presence of firms with labor and product market power poses a challenge for policymakers aiming to curb employers’ power without causing unintended harm.