Location decisions and Minimum Wages

The paper contributes to the living debate on the controversial effects of minimum wage policy on economic performances, focusing on its impact on firms’ location choice. The question is investigated through a theoretical model, that incorporates features from the new trade literature (Krugman (1991)) and the labor-market literature. In a two-country framework, we model endogenous entry of firms under wage rigidity. In this setting, the impact of an unilateral increase in the home country’s minimum wage is analyzed. The policy shock is shown to have a twofold influence on the relative attractiveness of the home country, simultaneously affecting its relative cost competitiveness and the aggregate demand addressed to firms. Both effects do not necessarily go in the same direction, hence the final effect on firms’ location decisions is ambiguous. We show that it notably depends on the adjustments that occur on the skilled and unskilled labor markets. Our overall results suggest that the design of labor-market policies should take into account their impact on firms’ location decisions, if willing to evaluate their whole consequences in the national economy.