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Prove That You Believe the Descriptive Accuracy of the Monopsony Model

Posted By Don Boudreaux On October 17, 2013 @ 4:49 pm In Other People's Money,Seen and Unseen,Work | Comments Disabled

Commenting on this post [1], Daniel Kuehn says

The demand curve is downward sloping in models where minimum wages have a positive effect. I know you know this. Could you PLEASE stop citing the law of demand when you argue this point?

First, Daniel mistakenly assumes that the majority (or even many) supporters of minimum-wage legislation have the monopsony model in mind as the basis for their support.  My sense, from decades of discussing this topic with students and reporters and politicians and pundits, is that most people who support the minimum wage do so because they are unfamiliar with the law of demand (or at least unfamiliar with this law’s applicability in the labor market).  They assume, usually unthinkingly, that the stated intention of the legislation determines the actual outcome of the legislation.  (The familiar explanation that employers will pass along their higher costs to consumers in the form of output-price hikes indicates that the typical minimum-wage advocate simply doesn’t think to think that the law of demand operates in the face of at least modest increases in the legislated minimum wage.)

Second, Daniel missed my allusion to monopsony in this passage in my post:

– or that that law is, in the case of low-skilled workers, so routinely overwhelmed by exceptional circumstances that its effect is nullified –

Chief among the exceptional circumstances that I had in mind here is the alleged monopsony power of employers of low-skilled workers.

Third, about the monopsony model – whose application to the reality of the market for low-skilled workers in modern-day America I find far less plausible than does Daniel.  I’ve a question for Daniel and others who support minimum-wage legislation on the grounds that employers of low-skilled workers are monopsonist buyers of such labor: Why do you not start your own businesses to hire these workers?  By your own assumption these workers are paid less than the value of their marginal products.  You can – and I am truly not being sarcastic – do well for yourselves by doing good for low-skilled workers by breaking the monopsony with your entry into the market for such workers.

Prove through your actions – by putting something of yours seriously at stake – that you really believe that monopsony infects the market for low-skilled workers in modern America.  And prove it not so much to make an academic point (although such actions on your part would indeed increase my own assessment of the plausibility of the monopsony model even as it destroys that model’s actual descriptiveness!), but, rather, prove it mostly to do good for poor workers.

Why not start, say, a maid service or a new hamburger joint or a lawn-care company?  In order to escape the graphical implications of your monopsony model, hire your entire complement of workers all at once at the wage that you propose government dictate as the minimum wage.  By hiring your workers in this way you will ensure that your firms don’t suffer marginal costs rising at a rate faster than the supply of low-skilled workers.  If you launch such firms, you will – again, by your own assumption – have access to a huge pool of workers currently now paid less than their marginal revenue products.

If your monopsony theory accurately describes the reality of the market today in the U.S. for low-skilled workers, why do you not make yourselves richer while simultaneously breaking the monopsony that you believe justifies legislation through which government, with your blessing, orders all low-skilled workers who cannot persuade employers to hire them at the ‘minimum wage’ to remain unemployed?

Again, I’m quite serious.  If you believe what you say, why are you not in business to exploit this profit opportunity?

….

From a different angle, there are also telling questions that can be asked about the monopsony model, each of which is sufficient to expose that model as a textbook nicety that even if it were descriptive of reality is not sufficient to justify minimum-wage legislation.  For example: What about that model ensures that employers will not respond, at least in part, to a rise in the minimum wage by substituting away from labor and toward substitute non-labor inputs?  You can draw the graph, I know, that shows that such substitution isn’t necessary, but that graph does not show that such substitution isn’t possible.  The monopsony model doesn’t show that such substitution isn’t, at the margin, the more profitable response of employers to a hike in the minimum wage.

Another question: monopsony in hiring labor does not guarantee monopoly in selling outputs.  If there is no monopoly in output markets, whatever above-normal returns these firms might once have enjoyed from their monopsony positions have surely been competed away by now in the form of lower output prices (or on some other margins).  A rise in the minimum wage will thus push the returns of many employers of low-skilled workers below normal.  How will these firms react?  They must do something to adjust in order to not go bankrupt.  How can you be sure that some of these firms will be able to react sufficiently to remain profitable?  If some of these firms go bankrupt, bam! – the employment prospects of low-skilled workers falls (just as the standard law of demand predicts!).

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