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Optimal minimum wage setting in a federal system

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  • Simon, Andrew
  • Wilson, Matthew

Abstract

Minimum wages in the United States are jointly set by federal, state, and local governments, while many other countries have a single national policy. This paper studies the relative merits of centralized and decentralized policy setting. A binding policy is optimal if the benefits from redistribution outweigh the costs from migration, which are relatively steeper for local governments. Centralized policy, though uniform in practice, reduces horizontal migration externalities, which improves decentralized minimum wage setting. Our results therefore indicate that decentralized and centralized policy setting exhibit strategic complementarity; the extent of which depends on mobility and regional heterogeneity. We then calibrate a model of the continental US and find that joint policy setting leads to a small welfare gain over centralization, and closely resembles the social planner’s optimal policies.

Suggested Citation

  • Simon, Andrew & Wilson, Matthew, 2021. "Optimal minimum wage setting in a federal system," Journal of Urban Economics, Elsevier, vol. 123(C).
    • Handle: RePEc:eee:juecon:v:123:y:2021:i:c:s0094119021000188
    DOI: 10.1016/j.jue.2021.103336
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