Priyaranjan Jha (University of California, Irvine)
We construct a theoretical model where workers' idiosyncratic preferences for different firms/employers generates monopsony power in the labor market and exhibits "love of firm variety" on the part of workers. In a heterogeneous firm setting, it also generates wage inequality among identical workers. In this setting, trade liberalization has implications for inequality and welfare. Trade liberalization affects welfare through a novel firm variety channel which depends on what happens to the mass of domestic firms: It provides additional welfare gains when monopsony power is high but detracts from welfare gains when monopsony power is low. Applying the model to the study of minimum wages, we find that the decentralized equilibrium under provides the mass of firms compared to the outcome achieved by a welfare-maximizing planner. A binding minimum wage further reduces the mass of firms, exacerbating the distortion. Workers value employer variety, and thus, by reducing firm variety the minimum wage reduces workers' welfare even if the average wage increases. Exploiting minimum-wage variation within multi-state commuting zones, we document a negative relationship between minimum wages and establishment counts in the United States. Based on estimated elasticities, our model predicts that a 10 percent minimum-wage hike reduces workers' welfare by 1.87 percent.
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