Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/213852 
Year of Publication: 
2020
Series/Report no.: 
IAAEU Discussion Paper Series in Economics No. 01/2020
Publisher: 
University of Trier, Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier
Abstract: 
Wages and employment are too low in a monopsony. Furthermore, a minimum wage or a subsidy may raise employment up to its first-best level. First, we analyze whether these important predictions still hold if workers compare their income to that of a refer- ence group. Second, we show that the undistorted, competitive outcome may no longer constitute the benchmark for welfare comparisons. Third, we derive a condition which guarantees that the monopsony distortion is exactly balanced by the impact of social comparisons. Finally, we show how wage restrictions and subsidies or taxes can be used to ensure this condition both for a welfarist and a paternalistic welfare objective.
Subjects: 
social preferences
government intervention
minimum wage
monopsony
taxation
wage regulation
JEL: 
D10
H21
J30
J42
Document Type: 
Working Paper

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