The Minimum Wage and Monopsony

I think the most serious problem with monoposony arguments is that wage descrimination is possible for firms that have that sort of market power.

With perfect wage discrimination, a minimum wage would increase the pay of many workers at monopsony firms, but the impact on employment would be the same as with perfect competition in the labor market.

Difficulties with price discrimination, like reselling, don’t seem like a problem with employment and pay.

While we can imagine paying new workers more than existing workers, realisticially, workers become more productive due to experience and there are a variety of benefits to paying workers less to start and then giving them raises as they become more productive.

If an employer wants more workers, he might need to increase starting pay relative to what starting pay had been. But there is no need to raise all existing workers’ pay (which is greater than starting pay) at all, much less in proportion.

It is called wage compression.

In my view, labor markets don’t clear very well. Usually, there will be some labor markets with shortages. Firms only gradually respond with increases in starting pay. Some may be waiting to see if more employees show up, consider improving working conditions, consider shift to lower quality workers, and so on. An increase in the minimum wage in that particular market solves the “problem” for the employers of how to respond to the shortage. They pay more, quantity supplied rises, and so, employment rises.

There are other markets, however, already in surplus and some that are exactly clearing. Employment decreases in those markets when there is an increase in the minimum wage.

The net effect depends on which particular markets are impacted in which way.

And any classical monopsony markets have an entire range where the higher minimum wage increases employment. Don’t forget that employment constrained by demand at a “too high” minimum wage might be greater than employment at the monoposony’s market wage. The minimum doesn’t have to be set at the competitive, employment maximizing level to increase employment relative to what the monosponist would provide.

If markets mostly clear most of the time, a higher minimum wage would usually decrease employment on net. (Leaving aside any monopsony markets) But is it any surprise that one could find some industries in some areas at some times where a higher minimum wage has little effect on employment or even increases it?

Well, I suppose it would be surprise if you ASSUME perfect market clearing.

In my view, during an economic expansion, labor demand grows briskly, and there is a “seller’s market” in labor. (Not a smoothly increasing equilibrium wage so that markets always clear.) Increasing the minimum wage would move towards the market clearing wage in many markets, though without the increase, the same improvements in over all worker conditions would happen more gradually.

On the other hand, raising the minimum wage when the econony is going into recession will likely exacerbate the decrease in employment. And in a weak recovery, when there is already a “buyers” market in labor, raising the minimum wage will likely slow the increases in employment, and might reverse them for a time.

If we assume that all workers are the same and all jobs are the same, then getting wages to the market clearing point is all the counts. If instead, there is entrepreneurship in the labor market, and so the best response to shortages of labor is not obviously higher pay, then mandating that higher pay clear the market is not obviously the best solution.

I think having a sellers market in labor is a good thing. It is good for employers to always be thinking about how hard it is to find a good employee and that replacing the current ones will be difficult.

I also think having employers thinking of ways to fill jobs with less productive workers as an alternative to paying more is good.

DRH:

To say that a firm has monopsony power is to say that the supply curve of labor to the firm is upward-sloping.

This puzzles me a bit. I think I can convince myself it will be true in equilibrium, because otherwise the monopsonist would have kept buying. Is this correct?

DRH:

But that means that the cost of hiring that n + 1st worker is not the wage, Wn + x, that the firm pays the worker: it’s that wage, Wn + x, plus x times n.

Again I wonder. This assumes that the firm has to pay more to the ealier empolyees, and that doesn’t seem like it has to be true. I can see it would be true of a large block of low skilled labor. (This clearly applies to the case Bob Murphy analyzes. I’m just working through the logic looking for implicit assumptions.) It’s not clear to me that if the NPGS hires a new economist at a high wage that they have to pay David more even if it were the only school in town. David might for instance have a contract.

@DRH:
I am a monoposonist in something, say empty candy wrappers. Your claim is that I face an upward sloping supply curve for candy wrappers. I don’t see why that must be true UNLESS I have been at it for a while, and have purchased all I can get until the curve starts bending upwards. For the first few months I was in clover, I could get all the wrappers I wanted, and cheap. Eventually I have nearly all of them, and face only those sleers who really value their wrappers. An equilibrium is reached because the curve is upward sloping. So I can see this being true in equilibrium, but I don’t see why being the only buyer means ipso facto I face an upward sloping curve. I bet that if I do start buying used wrappers I will initially face a downward sloping curve as news spreads of my folly.

Am I right or am I missing something?

@DRH: OK, I see the disconnect. I thought you were talking about monopsony being ineluctably connected to an upward slope. To me that makes little sense because it ignores what the item purchased is, and what sellers want, but I can see why it would hold in equilibrium. But you actually mean that for the monopsonist to have *power* from the monopsony the curve must be upward.

Is that correct?

“Presumably, low-wage, high-turnover employers believed themselves to be maximizing profits. That is, the loss from the increment of turnover was less than the loss from paying higher wages to avoid that increment of turnover. Given that assumption, when the government steps in and imposes a minimum wage, the net cost of an employee is higher. By the law of demand, the employer will hire fewer employees.”

I’m not following your logic here. The monopsony logic that you explained correctly in the previous paragraph shows that minimum wage (if set just right) will raise the average cost per employee but *lower* the marginal cost per employee. This is so because the minimum wages causes the x*n component of the (n+1)th worker’s cost to be imposed anyway, even if the (n+1)th worker isn’t hired. So showing that average cost per worker will rise isn’t sufficient to show — via the law of demand — that the employer will hire fewer workers. Am I misunderstanding your argument?

I don’t understand the connection between monopsony and the need to increase everyone’s pay when hiring a new worker. Does this follow logically from the monopsony itself, or is it just an assumption of the model? Bill Woolsey mentions raising only the starting pay while keeping it below the pay of experienced workers, but even that seems like an unnecessary restriction. Why not just pay new workers more (i.e. let the starting pay exceed the pay of experienced workers)? Doesn’t the logic of a minimum wage increasing employment in a monospony rest entirely on the idea of having to increase everyone’s wage?

My experience with low wage, high turnover positions is that employment falls due to the time required to advertise the position, review applications, interview applicants, offer the position to the best applicant, offer the position to the second best applicant if the first declines, etc. During that time the business is one employee short. This happens again when another employee leaves.

I oversaw a section that needed twelve (low wage) employees, and we typically had only ten. It would have taken a big pay raise (that wasn’t possible in a VA hospital) to reduce turnover.

@Brian: Scenario: A business has newbies at minimum wage ($7.75 per hour), not-so-newbies at $8.75, and old-hands at $10. Minimum wage rises to $9.00. The not-so-newbies will be miffed if their pay only rises to $9.00 because it’s the same as the newbies. The not-so-newbies would expect to be paid $10.00 to maintain their $1 per hour differential. But, the old-hands are now being paid the same as the not-so-newbies. The old hands expect $11.25 to maintain the previous differential.

David,

Thanks for that confirmation. But what I really want to know is what monopsony itself has to do with any of this. Wouldn’t the same effect of the minimum wage hold in the case of multiple competitive employers who, for some reason, have to raise the wages of all when they make a new hire at an increased wage? If monopsony doesn’t logically require this condition, then isn’t monopsony irrelevant to the argument? And if it DOES require the condition, why?

Ok, one more try! This is just the cartel argument for monopoly. If all employers banded together they would collectively face an upward supply curve, since they are facing the total supply, which by diminishing returns must slope up, and if they could cartelize could hire fewer at a lower wage but greater profit. With competition they could not make the cartel stick. With monopsony “they” can.

Monopolists produce less than the efficient amount, and monopsonists “produce” less hours of labor demanded. Hence the power.

As for why the curve is up, the key point is that the total supply must curve up, but in a competitive market no employer faces the total supply, so he faces a flat curve (first approximation). A monopsonists does face the total supply.

Correct?

@Ken B,
Correct.

It seems to me that all this discussion relates to the short term demand for labor. Over the course of a few years, I think the direction of labor demand in the face of a minimum wage has to be downward. Over that time period, workers have the chance to change professions and industries adjust to get around those companies with excess market power. Over this longer period the quirks of monopsony and such have little effect.

Also, minimum wages actually lower the workers’ market power. Bill Woolsey alluded to this. When minimum wages and other labor laws make it more expensive for firms to hire workers than it would be in a free market, then the labor market will not clear, leaving some willing workers with no position. This makes it much easier for employers to mis-treat their workers and makes the employment situation more stressful for workers. The ideal state would be if workers always had positions available with a small amount of effort to find the employers. I think this would be the normal state of our economy if labor laws disappeared. Labor laws make the workers’ life much more difficult.