Higher minimum wages raise large firms' price markups
Higher minimum wages reduce employers' labor market power but increase large firms' price markups. Bank of Italy research by Salvatore Lo Bello and Lorenzo Pesaresi, published October 20, 2026, quantifies this offset using Italian data.
Wage gains meet pricing power
Higher wage floors push smaller, less productive firms to contract or exit, reallocating workers toward larger firms that gain market share and raise markups.
In the simulations, product market power rises by up to 2.2 percentage points, offsetting one-third of the reduction in labor market power, which falls by up to 6.7 percentage points.
The welfare-maximizing minimum wage equals 70 percent of the pre-reform median and directly affects 10 percent of workers.
Consumption rises 1.2 percent and consumption-equivalent welfare gains reach 0.8 percent, while unemployment rises from 13.5 to 15.1 percent.
Consumption instead peaks at a wage floor of 89 percent of the median, affecting 35 percent of workers, with a 2.3 percent gain.
Fixed markups overstate the gains
The authors estimate a model combining frictional labor markets and oligopolistic product markets using Italian National Social Security Institute and Italian Institute of Statistics data.
It covers eight industries and two skill groups.
Evidence from contractual wage floors during 2005–2020 supports worker reallocation and lower labor-share responses in concentrated product markets.
Holding markups fixed raises the optimal floor from 70 to 75 percent of median wages, affecting 15 rather than 10 percent of workers; welfare gains rise from 0.8 to 1.1 percent.
Consumption is not welfare
The authors find that consumption gains coexist with employment losses, limiting the welfare case for higher floors.
Low-skilled workers' welfare peaks when 7 percent of workers are affected.
The model excludes transition dynamics, savings, capital substitution and long-run entry responses.