Bridging the Employment Debate: The Minimum Wage and Monopsonistic Competition

Abstract

This paper examines the effects of minimum wage increases on firm production decisions across two industries, extending beyond the traditional focus on aggregate employment effects. Using restricted firm- and establishment-level data from the US Census, we examine the impact of average, medium, and large minimum wage increases on production decisions across both the retail and manufacturing industries and among firms of varying sizes. We reveal significant heterogeneity in firm-level production responses, finding disemployment and negative labor share effects among smaller firms, and positive employment and labor share effects among larger firms, supporting the theory of monopsonistic competition. Focusing on retail and manufacturing industries, we observe that minimum wage increases prompt higher investment-labor ratios and automation in large manufacturing firms, potentially offsetting positive some employment effects. We characterize a dynamic model of firm entry and exit with an instilled monopsonistic competition setting to match the short-run treatment effects and quantitatively determine the short-run and long-run macroeconomic effects of minimum wage increases of varying sizes. We estimate lower markdowns than prior literature estimates in the context of this model, and large minimum wage increases lead to higher relative investment and lower employment.