Economic Theory Seminar - Ellen Muir (Harvard)

Title: Optimal labor procurement under minimum wages and monopsony power

Simon Loertscher and Ellen V. Muir

Abstract: We extend the mechanism design methodology to derive the optimal procurement mechanism for a monopsony under a minimum wage constraint. For a setting where a continuum of workers have private information about their opportunity cost of working, we show that the cost-minimizing procurement mechanism involves at most two wages. It involves two wages and involuntary unemployment if the procurement cost under a uniform wage lies below its convexification at the optimal employment level. Setting the minimum wage equal to the highest wage offered under laissez-faire increases total employment and workers’ pay, and decreases (possibly eliminating) involuntary unemployment. If a minimum wage does not induce involuntary unemployment or induces both involuntary unemployment and wage dispersion, then a marginal increase in the minimum wage generically increases employment and decreases involuntary unemployment. Binding minimum wages can make a two-wage mechanism and involuntary unemployment optimal even if a uniform-wage mechanism is optimal under laissez-faire.