Endogenous Monopsony and the Perverse Effectof the Minimum Wage in Small Firms

The minimum wage rate has been introduced in many countries as a means of alleviating thepoverty of the working poor. This paper shows, however, that an imperfectly enforcedminimum wage rate causes small firms to face an upward-sloping labor supply schedule.Since this turns these firms into endogenous monopsonists, the minimum wage rate has theperverse effect of reducing employment in small firms as well as what these firms offer theirworkers. Thus, if there are only small firms, the minimum wage rate makes all workers thatwould be employed in the absence of a minimum wage rate worse off....