monopsony20 Nov 2005
In a discussion of Wal-Mart recently advocating a higher minimum wage, Chris Wage* writes “[the minimum wage] nonetheless has the immediate impact of raising the quality of life for everyone it affects - monopoly or no monopoly.”
Except for the people whose skills are marginal enough that it’s no longer worth hiring them at the higher minimum wage so they can’t get jobs anymore. Or for the people in a marginal industry with lots of foreign competition who suddenly lose their jobs because the higher minimum wage pushes the price of their company’s product so high it’s no longer competitive.
This analysis hinges on the assumption of a perfectly competitive market for labor. There are some problems with that approach, however. While it may be appealing to apply cut-and-dry Marshallian supply/demand logic to this problem, the labor market is a quintessential example of imperfect competition. There’s very little empirical evidence to support the claim that minimum wages and subsequent changes to them result in unemployment. In their 1997 book, Myth and Measurement: The New Economics of the Minimum Wage, David Card and Alan Krueger looked at increases in the minimum wage in CA, NJ, and at the federal level and found no compelling evidence of unemployment as a result.
Their conclusion is that the market for low-wage labor is in fact pretty inelastic. Another important factor is the idea of Monopsony – a form of imperfect competition increasingly being applied to the labor market wherein the collusion of limited “buyers” of labor in an oligopsony causes the market for labor to reach equilibrium at a point such that it underemploys and underpays. In such a market, a price floor could actually have the counterintuitive effect of adding jobs.
Anyways, to make a long story short, competition in the labor market isn’t perfect, so you can’t just toss a supply/demand curve at it and call it a day. It reminds me of the rather amateurish absolutist strategy in the dieting world of strictly balancing caloric intake with caloric expenditures (i.e. the Hacker’s Diet). That’s nice in theory, but the human body is not a bomb calorimeter, and is in fact a lot more complicated. But I digress.
So while the Econ 101 model of the labor market tells us that a minimum wage should cause unemployment there’s been no solid evidence in the last century that it actually has, so it falls a little flat as an argument against enacting or raising the minimum wage.