The Minimum Wage in a State Union with Unemployment Insurance

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.