Goods market desirability of minimum wages

Abstract

This paper presents a general equilibrium model incorporating heterogeneous firms and a perfectly competitive labour market to explore the desirability of minimum wages. We demonstrate that a low minimum wage could enhance social welfare, assuming equal weighting for all individuals. This occurs because the introduction of minimum wages has the potential to mitigate the goods market distortions arising from imperfect competition, firm heterogeneity and free entry. Additionally, we illustrate that the optimal minimum wage is positively associated with the preference intensity for differentiated products relative to the numeraire and population size, while it negatively correlates with the degree of love for variety, entry cost, and upper bound of marginal labour requirements.