Minimum wage competition
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Minimum wage competition Koichi Fukumura1 · Atsushi Yamagishi2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper shows that increased factor mobility might cause the “race to the top” in minimum wage settings, contrary to what other studies have suggested. By focusing on geographical labor mobility, we propose a minimum wage competition model and show that minimum wage rates may increase after a significant increase in mobility because it allows each government to less internalize the negative effect of the mini‑ mum wage increase. This result is consistent with the data on European countries from the period of EU’s massive enlargement. We also show that minimum wage rates respond positively to increased geographical mobility when (1) mobile workers face significantly worse labor market conditions, (2) the concerns of economic effi‑ ciency are small, and (3) the share of mobile workers is relatively small. The model also yields a normative implication that coordination in setting minimum wages is needed to achieve a desirable outcome. Keywords Minimum wages · Geographical mobility · Intergovernmental competition · Immigrants · Race to the top JEL Classification H23 · H77 · I38 · J61 · J68
* Atsushi Yamagishi [email protected] Koichi Fukumura [email protected]‑u.ac.jp 1
Faculty of Economics, Kagawa University, Takamatsu, Japan
2
Department of Economics, Princeton University, Princeton, USA
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K. Fukumura, A. Yamagishi
1 Introduction Minimum wage policies are adopted in numerous countries, including both devel‑ oped and developing ones. Despite the potential concerns that minimum wage poli‑ cies may cause substantial unemployment, we can easily find many recent examples of minimum wage increases.1 For example, at the national level, Germany intro‑ duced minimum wages in 2015. Minimum wage increases are also widely observed at the subnational level. A prominent example is Seattle, which has decided to grad‑ ually increase its minimum wage to $15 per hour starting from 2015. However, such prevalence of minimum wage increases may be puzzling given the increased mobility of capital and labor in the twenty-first century. Both prior theoretical and empirical works have suggested that the increased mobility of pro‑ duction factors seems to make governments rely less on minimum wages through various channels. When capital markets are integrated across regions, each region attempts to attract capital through policy instruments. One such typical instrument is undercutting tax rates (Zodrow and Mieszkowski 1986; Devereux et al. 2008); how‑ ever, regions can also attract capital by loosening labor-related regulations because it alleviates the labor costs incurred by firms.2 For example, Davies and Vadlaman‑ nati (2013) and Olney (2013) empirically demonstrate that governments relax labor standards to attract firms or investments. Gabszewicz and van Ypersele (1996) show that governments lower minimum wage rates to attract capital when capital mark
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