The CEA's Mixed Thinking on Labor Market Monopsony, Part III
By David Henderson
The Minimum Wage
The CEA writes:
Economic theory suggests that in competitive markets, wages are already bid up until they just equal the marginal value of labor to the firm; therefore if a minimum wage in a perfectly competitive market rose above the marginal value of labor, economic theory predicts that it would lead to a reduction in hours or jobs. But when labor markets are not perfectly competitive or when a monopsonistic firm reduces wages and employment below the levels that would prevail in a competitive market, there is scope for a higher minimum wage to raise both wages and employment.
Beginning in the early 1990s with the influential work of Card and Krueger (1995), research began to find evidence of minimum wage increases that were not accompanied by job loss. Surveys of the minimum wage literature since then show the estimated employment effects are mostly close to and centered around zero (Belman and Wolfson 2014).8 This research has spurred many economists to question the conventional wisdom that labor markets are generally competitive and demonstrated that minimum wage increases can lift wages without impacting employment levels (Ashenfelter, Farber, and Ransom 2010). (p. 9)
The CEA is giving here the well-known result that a skillfully set minimum wage, finely tuned to local labor market conditions, can increase wages and employment in a monopsonistic labor market. But it’s a big reach from that to the conclusion that an increase in the minimum wage will have no harmful effect on employment. The CEA report makes no mention, even if only to disagree, of the work of one of the leading experts on the effect of minimum wages on employment, David Neumark. In a December 2015 report from the San Francisco Federal Reserve Board, Neumark wrote:
How do we summarize this evidence? Many studies over the years find that higher minimum wages reduce employment of teens and low-skilled workers more generally. Recent exceptions that find no employment effects typically use a particular version of estimation methods with close geographic controls that may obscure job losses. Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss. Coupled with critiques of the methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers–with possibly larger adverse effects than earlier research suggested.
Also, here’s where the aforementioned Adam Ozimek makes a devastating point in his critique:
Fourth, the CEA report points to the minimum wage literature as evidence of monopsony power. Leaving aside the debate over whether the minimum wage reduces employment (I say yes, the report says no) the literature clearly shows that the minimum wage increases prices. As Daniel Aaronson and Eric French have pointed out, the monopsony model implies that the minimum wage should increase employment and output, thereby decreasing prices. That prices rise is inconsistent with the monopsony model.
The CEA did not look hard to find evidence, again making this look like not just an economic but also a political document.
Back to Ways Around the Efficiency Problem
The CEA report:
As explained by Weil (2014), firms have increasingly been able to reduce labor costs through outsourcing and subcontracting, which frees them from internal equity constraints. (p. 10)
Exactly. As I noted in Part II of my critique, this evidence contradicts the CEA’s report that monopsonists don’t compete aggressively for labor. To the extent they do what Weil says, they reduce the inefficiency problem due to monopsony.
Rising Market Concentration
The CEA argues that rising market concentration in particular industries facilitates collusion. All other things equal, that’s correct. Two things to add, though. First, the CEA says little about what led to rising market concentration. Does it occur to the CEA writers that when regulation increases, the “economies of scale in compliance” [I have written about that here and here] disproportionately hurt small firms? They don’t mention it. Second, the CEA writes, “Indeed, evidence of rising market concentration and monopoly-style profits is especially strong in the health-care and technology sectors.” (p. 10) Health-care sector. Hmmm. Has anything happened in the health-care sector in recent years that might have led to higher concentration? The CEA elsewhere mentions the Affordable Care Act, aka Obamacare, positively. Does that factor in here? They don’t say.
The Role of Regulation
The CEA plays a strong hand in noting the damaging effects on mobility of occupational licensure and land-use regulations:
There are several reasons to suspect that the downward trend in labor market dynamism is due to rising costs of switching jobs. One is that this trend has occurred alongside upward trends in regulatory barriers that impede worker mobility (Davis and Haltiwanger 2014; Furman and Orszag 2015). Relative trends in housing prices and construction costs suggest that land-use regulations have become more restrictive in recent decades (Glaeser, Gyourko and Saks 2005). Excessive regulations could explain rising housing prices in a large and growing set of cities (Gyourko and Molloy 2014), which in turn can make it hard for workers to move to where the best jobs are.
The past five decades have also seen a strong upward trend in the prevalence of occupational licensing requirements (Figure 4); during this time, the share of U.S. workers needing a license to do their job has grown roughly fivefold (Kleiner and Krueger 2013, CEA, Department of Labor, and Department of the Treasury 2015). CEA analysis shows that much of this increase has been due to an expansion of licensing into new professions, which may have negatively affected many lower-income individuals for whom the cost of obtaining a license can be especially onerous (CEA, Department of Labor, and Department of the Treasury 2015). The growth in occupational licensing has likely been restricting employment options and may be reducing bargaining power for less skilled workers. But further, because of the variation in licensing regulations across States, their increased prevalence also reduces geographic mobility for a growing number of workers in licensed occupations (Kleiner 2015). (p. 11)
The Role of Unions
The CEA notes the huge decline in private-sector union membership in the last few decades (down to 7 percent), and argues that that is a bad thing:
Research suggests that declining unionization accounts for between a fifth and a third of the increase in inequality since the 1970s (Western and Rosenfield 2011). (p. 13)
I’m skeptical about the effect on inequality. Basic economics says that giving unions monopoly power (which is what the CEA implicitly advocates if it is defending U.S. labor law) would have two competing effects on inequality: (1) the one the CEA focuses on, which is that many workers get paid somewhat more, reducing the gap between their income and that of owners of capital, and (2) the one the CEA says nothing about: if the higher wage negotiated by unions causes employers to hire fewer people (that is, if, the monopsony the CEA posits is not strong), some of those not hired cause wages to fall in the sectors they go to. You might argue that I’m begging the question here–and I am. But the point is that the CEA’s explicit claim that union power offsets monopsony power is just that: a claim, and a claim that the CEA does not support with evidence.
Moreover, unions notoriously reduce labor mobility, which, the CEA admits, is one of the key factors in monopsony. The seniority wage structure that unions bargain for means that once workers get union jobs, they are less likely to leave them voluntarily the longer they stay–because the more they have to lose.
Also, the aforementioned Adam Ozimek is worth quoting here:
The CEA paper also recommends more unionization as a solution. While unions can be efficient in the face of monopsony power, increased unionization won’t necessarily occur at the employers with monopsony power. Indeed, the literature consistently shows that unionization decreases job growth at the firm level. This undermines the CEA’s conjecture that unions may deliver “even more efficient levels of employment.”
Back to the Minimum Wage
The CEA writes:
The Federal minimum wage has also provided a check against monopsony wage setting in the past–especially among the lowest earners, who are often the most vulnerable to wage-setting power by employers. In a trend that parallels the decline in unions, however, the real value of the Federal minimum wage has declined 24 percent since its peak of $9.55 (in 2015 dollars) in 1968, eroding its ability to protect those workers with the fewest options. (p. 13)
It’s not at all clear that the lowest earners are “often the most vulnerable to wage-setting power by employers.” The lowest earners are typically the least skilled and the least skilled often have many options. The options might be lousy options from your or my point of view. But the point is that if they have many lousy options, they are not vulnerable to monopsony. Also, the last sentence quoted above is ironic. It is precisely the minimum wage that takes away, and sometimes destroys, options of the least skilled–by pricing them out.
Again, this is getting overly long. Part IV is next.