1 Overview
The minimum wage is among the most studied topics in labour economics, and the last several years have seen methodological advances that have significantly changed our understanding of its effects. The traditional debate—does the minimum wage reduce employment?—has been reframed by distributional methods that ask what the minimum wage does to the entire wage distribution, not just to aggregate employment. Simultaneously, the monopsony literature has provided a theoretical framework under which minimum wages can raise employment by correcting downward wage pressure from employers with market power.
This issue surveys four recent papers that advance different aspects of the minimum wage debate using the latest causal inference methods.
2 Paper 1: Cengiz, Dube, Lindner, and Zipperer (2019)— "The Effect of Minimum Wages on Low-Wage Jobs"
Citation: Cengiz et al. [2019], Quarterly Journal of Economics, 134(3):1405-1454.
Research Question: What is the effect of minimum wage increases on the distribution of wages and employment, both below and above the new minimum?
Identification Strategy: The authors use a bunching-inspired difference-in-differences approach. Instead of examining average employment, they compare the entire wage distribution in states that raised their minimum wage to states that did not, using a "count of jobs" approach: they count the number of jobs in wage bins below the new minimum (which should mechanically disappear if the minimum wage is binding) and bins above the new minimum (which may increase if the minimum wage creates new, better-paying jobs).
The identifying assumption is that absent minimum wage increases, the distribution of jobs below and above the eventual minimum wage level would have evolved in parallel across treated and control states. This is a distributional parallel trends assumption, not just a parallel trends assumption on average outcomes.
Key Results: Over 1979-2016, each dollar increase in the minimum wage raises average wages in the affected range by about 7% and generates no statistically significant change in employment overall. The "missing jobs" below the new minimum are essentially fully replaced by new jobs in the bunching zone just above the new minimum. The estimated employment elasticity at the median estimate is close to zero, with the 95% confidence interval ruling out large negative effects.
Importantly, the paper finds no evidence of "spillover jobs destroyed" above the minimum—the employment losses are contained to the range just below the new minimum, and they are fully offset by new jobs at the minimum.
Methodological Contribution: The bunching-based distributional approach is more informative than a single employment elasticity estimate. It shows not just the average effect on employment but the full distributional shift, enabling researchers to decompose effects into displacement of below-minimum jobs and creation of above-minimum jobs.
One-Sentence Takeaway: Well-identified minimum wage increases appear to raise wages for low-wage workers without causing detectable aggregate employment losses, at least within the range of variation observed in the US over the past four decades.
3 Paper 2: Harasztosi and Lindner (2019)— "Who Pays for the Minimum Wage?"
Citation: Harasztosi and Lindner [2019], American Economic Review, 109(8):2693-2727.
Research Question: Who bears the cost of minimum wage increases—workers (through employment losses), consumers (through higher prices), or firm owners (through lower profits)?
Identification Strategy: Hungary's minimum wage doubled in two years (2001-2002), from 25,500 to 50,000 Hungarian forints per month. This is a much larger increase than is typically studied in the US context and creates unusually large variation in the "bite" of the minimum wage across firms and industries. Firms with a high initial share of workers earning below the new minimum were much more exposed than firms with a high initial share of high-wage workers.
The paper exploits this cross-firm variation in treatment intensity using a DiD-style design, comparing firms with high vs. low initial exposure to the minimum wage increase. Firm-level data from administrative Hungarian tax records are used to track employment, wages, output, and profits.
Key Results: For each 1% increase in wages at the minimum wage level, employment falls by approximately 0.1%—a small employment effect. Most of the adjustment occurs through prices: firm-level product prices rise by 0.5-0.9%, and the cost of the minimum wage increase is largely borne by consumers rather than workers or shareholders. This price pass-through is consistent with imperfect competition in product markets, where firms have market power to raise prices without losing all demand.
The paper finds heterogeneous effects: firms in tradeable sectors (which face more international competition) absorb more of the cost through reduced profits, while firms in non-tradeable sectors pass it on to consumers.
One-Sentence Takeaway: Minimum wage increases are largely paid for by consumers through higher prices, not by workers losing their jobs, at least when the labour market is characterised by imperfect competition.
4 Paper 3: Manning (2021)— "Monopsony in Labor Markets: A Review"
Citation: Manning [2021], Journal of Economic Literature, 59(1):123-179.
Research Question: Is employer market power (monopsony) widespread in labour markets, and does it provide a theoretical rationale for minimum wages to raise employment?
Identification Strategy: This is a review paper that synthesises the evidence on monopsony from multiple identification strategies, including:
- Recruiting frictions: If firms face upward-sloping labour supply curves because workers do not instantly move to the highest-paying job, they have monopsony power. Estimates of the labour supply elasticity to the firm—the percentage increase in labour supply for a 1% wage increase—directly measure the degree of monopsony.
- Minimum wage employment elasticities: Under competitive markets, minimum wages above the equilibrium wage reduce employment. Under monopsony, they can increase employment. The sign and magnitude of the employment elasticity therefore provides indirect evidence about market structure.
- Mergers and acquisitions: When firms merge, the combined entity has greater labour market power. DiD studies comparing wages at firms that experienced M&A to similar non-merging firms can recover the wage-setting effect of increased concentration.
Key Results: The review finds substantial evidence of monopsony across US and European labour markets. Estimates of the firm-level labour supply elasticity cluster around 2-5, far below the competitive benchmark of infinity. Meta-analysis of 25 minimum wage studies finds an average employment elasticity of approximately -0.1 to 0, consistent with moderate monopsony dampening the negative employment effects.
One-Sentence Takeaway: Monopsony power is widespread, implying that minimum wages operate in a market structure where their employment effects are smaller and their welfare effects more positive than in competitive models.
5 Paper 4: Rinz (2022)— "Labor Market Concentration, Earnings, and Inequality"
Citation: Rinz [2022], Journal of Human Resources, 57(S):S251-S283.
Research Question: Does local labour market concentration measured by the Herfindahl-Hirschman Index (HHI) of employer market share in a commuting zone-industry cell reduce wages?
Identification Strategy: Administrative data from the US Longitudinal Employer-Household Dynamics (LEHD) database provide near-universal coverage of employer-employee linkages. Concentration is computed as the sum of squared employment shares within each local labour market (commuting zone × industry × year). The paper uses worker-level wage regressions with worker and market fixed effects to identify whether moves from less concentrated to more concentrated markets are associated with wage reductions.
Key Results: A 1-standard-deviation increase in HHI reduces wages by approximately 6-7%. The effect is larger for workers with fewer alternative employers (less educated workers, workers in rural areas). Increased labour market concentration accounts for a meaningful fraction of the rise in earnings inequality since the 1980s: as industries consolidated, the wage gap between workers in highly concentrated and competitive markets widened.
One-Sentence Takeaway: Labour market concentration reduces wages substantially, and the rise in employer market power since the 1980s contributed to growing earnings inequality—providing a structural reason why minimum wages may have redistributive value beyond what competitive models predict.
References
- Cengiz, D., Dube, A., Lindner, A., and Zipperer, B. (2019). The effect of minimum wages on low-wage jobs. Quarterly Journal of Economics, 134(3):1405-1454.
- Harasztosi, P. and Lindner, A. (2019). Who pays for the minimum wage? American Economic Review, 109(8):2693-2727.
- Manning, A. (2021). Monopsony in labor markets: A review. Journal of Economic Literature, 59(1):123-179.
- Rinz, K. (2022). Labor market concentration, earnings, and inequality. Journal of Human Resources, 57(S):S251-S283.
- Card, D. and Krueger, A. B. (1994). Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania. American Economic Review, 84(4):772-793.
- Dube, A., Lester, T. W., and Reich, M. (2010). Minimum wage effects across state borders: Estimates using contiguous counties. Review of Economics and Statistics, 92(4):945-964.