Promoting Labour Market Efficiency and Fairness through a Legal Minimum Wage: The Webbs and the Social Cost of Labour

Neoclassical economists, using a competitive demand/supply model of labour markets, typically conclude a legislated minimum wage is harmful to economic efficiency and social welfare. The major theoretical counter‐attack by proponents of a minimum wage is to argue that low‐wage labour markets are better modelled as monopsonistic. This article develops and formalizes a second theoretical defence for a legal minimum wage law. This defence rests on the concept of the social cost of labour , as originally popularized by Sidney and Beatrice Webb and then further developed by American institutional economists. This analysis is unique in that it continues to use the competitive demand/supply model but nonetheless demonstrates that a legislated minimum wage often simultaneously increases both economic efficiency and fairness, unlike the neoclassical prediction.