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The Minimum Wage in a State Union with Unemployment Insurance

Author

Listed:
  • Robert Fenge
  • Max Friese

Abstract

In a union of states with partial mobility of households and firms we analyze the setting of minimum wages against the background of unemployment insurance. We find that unemployment insurance is always efficiently organized by decentral decisions. In contrast, for symmetric states only the central setting of minimum wages is efficient. Decentralized minimum wages can be shown to be generically inefficient because the decision makers either externalize the cost of unemployment via the pooled insurance budget or exploit migrational externalities. Only with full mobility, the opposing migration effects outweigh the pooling effect. Our results suggest that contrary to insurance which can be efficiently organized decentrally, a pure redistribution like minimum wages should be centralized in a state union.

Suggested Citation

  • Robert Fenge & Max Friese, 2025. "The Minimum Wage in a State Union with Unemployment Insurance," CESifo Working Paper Series 11770, CESifo.
  • Handle: RePEc:ces:ceswps:_11770
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp11770.pdf
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    More about this item

    Keywords

    minimum wage; unemployment insurance; centralization; international migration; common pool problem.;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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