Employment-maximising Minimum Wages

Abstract
Motivated by a reduced-form evaluation of the impacts of the German nationally uniform minimum wage on labour, goods and housing markets, we develop a quantitative spatial general equilibrium model that nests a monopsonistic labour market with heterogeneous firms and allows for commuting and regional migration. The model predicts that the employment effect of a minimum wage is a bell-shaped function of the minimum wage level. Consistent with the model prediction, we find the largest positive employment effects in regions where the minimum wage corresponds to 48% of the pre-policy median wage and negative employment effects in regions where the minimum exceeds 80% of the pre-policy median wage. Our estimates provide first bounds for evidence-based minimum wages that avoid detrimental employment effects. Joint with Gabriel Ahlfeldt and Duncan Roth.