Bridging the Employment Debate: The Minimum Wage and Monopsonistic Competition

Abstract

This paper examines the effects of minimum wage increases on firm production decisions for small to large firms in the manufacturing and retail sectors, extending beyond the traditional focus on aggregate employment effects. Using restricted firm- and establishment-level data from the US Census, we use a stacking and synthetic difference-in- differences approach to estimate the average treatment on the treated resulting from minimum wage increases on employment and other secondary production-related measures. We reveal significant heterogeneity in responses across firm size, finding disemployment effects among smaller firms, and positive employment effects among larger firms. Focusing on retail and manufacturing sectors, we observe that minimum wage increases prompt higher investment-labor ratios and automation in large manufacturing firms and lower investment-labor ratios for large retail firms. 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 wage markdowns as approximately 11-13% of labor demand. Historically average increases in the minimum wage negligibly impact aggregate employment responses while a $15 minimum wage equivalent elicits a strong, negative impact on aggregate sector employment.