<p>Generally speaking it depends on parameters of the economy. There is no single answer without specifying exact parameters of the economy.</p>
<p>For example, if labor markets are perfectly competitive and government mandates wages to increase above <em>equilibrium wages</em> this would reduce overall welfare as measured by total surplus (see Mankiw Principles of Economics pp).</p>
<p>However, if markets are not perfectly competitive this might have no negative effect on an economy. For example, if firms have market power that generates some <em>quasi</em>-rents it is perfectly possible that increase in wages just redistributes higher share of national income to workers (see discussion of more nuanced models in Borias Labor Economics pp 119-191).</p>
<p>Furthermore, it also matters if there are some market failures or behavioral considerations. For example, maybe firms are not paying workers optimum wages because most firms are run by managers not owners so there could be some principal agent problems. In this case mandating higher wages could even be potentially welfare enhancing.</p>
<p>So the effect of mandating higher wages is completely ambiguous unless we specify  what sort of market we are talking about and what are the parameters of that market.</p>
<p>Depending on the exact market structure and market parameters mandating higher wages could be either:</p>
<ul>
<li>decrease total welfare</li>
<li>have no effect on total welfare, just some redistribution effects</li>
<li>increase total welfare</li>
</ul>

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1muflon1
<p>Generally speaking, is it any more advantageous/disadvantageous for the government to mandate a wage increase than for companies to increase wages based on the supply of labor?</p>

<supply-and-demand><fiscal-policy>
Is it any more harmful for the government to mandate a wage increase?
StackExchange7
# Is it any more harmful for the government to mandate a wage increase?

(Asked by: username_0 on 2022-01-11)

Generally speaking, is it any more advantageous/disadvantageous for the government to mandate a wage increase than for companies to increase wages based on the supply of labor?

**Tags:** supply-and-demand, fiscal-policy

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## 1 answers

### Answer by username_1 on 2022-01-11. Score: 1

Generally speaking it depends on parameters of the economy. There is no single answer without specifying exact parameters of the economy.

For example, if labor markets are perfectly competitive and government mandates wages to increase above *equilibrium wages* this would reduce overall welfare as measured by total surplus (see Mankiw Principles of Economics pp).

However, if markets are not perfectly competitive this might have no negative effect on an economy. For example, if firms have market power that generates some *quasi*-rents it is perfectly possible that increase in wages just redistributes higher share of national income to workers (see discussion of more nuanced models in Borias Labor Economics pp 119-191).

Furthermore, it also matters if there are some market failures or behavioral considerations. For example, maybe firms are not paying workers optimum wages because most firms are run by managers not owners so there could be some principal agent problems. In this case mandating higher wages could even be potentially welfare enhancing.

So the effect of mandating higher wages is completely ambiguous unless we specify what sort of market we are talking about and what are the parameters of that market.

Depending on the exact market structure and market parameters mandating higher wages could be either:

* decrease total welfare
* have no effect on total welfare, just some redistribution effects
* increase total welfare


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