The Science of the Minimum-Wage Debate

by Don Boudreaux on October 25, 2013

in Competition, Regulation, Seen and Unseen, Work

Among the topics discussed in my Econ 103 (Principles of Microeconomics) class this past Tuesday night was minimum-wage legislation.  The minimum wage is, every semester, my chief real-world example of a legislated price floor – a government policy that I discuss immediately after I cover legislated price ceilings such as rent control and the 1970s caps on energy prices.

As always, I informed my students that, compared to twenty or thirty years ago, a smaller portion of economists today agree that minimum-wage legislation harms low-skilled workers.

After class a handful of students walked with me to my car to continue the minimum-wage discussion.  I went with them into more detail into the monopsony model.  (I’m tempted to be pleased that the reaction of each of these four students to the claim that employers such as McDonalds and Wal-Mart have monopsony power as employers of low-skilled workers was one of disbelief – and with no prompting from me.  But I resist this temptation because many students – I can’t speak for those specific four – also react with disbelief, when they first encounter the argument, that Americans should cheer rather than fear free trade with low-wage countries such as Mexico and China.  Untutored instincts are sometimes accurate and sometimes wildly inaccurate.)

Anyway, I sent to these students links to many of the relevant posts here at the Cafe on this topic as well as links to the Card-Krueger paper and to this recent PBS interview of Krueger.  I promised – in exchange for their promise to read and ponder the materials I sent to them – a follow-up blog post on some questions that I believe proponents of a legislated minimum-wage must answer before their policy recommendations are taken seriously.  Some of these questions have been asked here before; some are new.

So, here are some more questions to proponents of legislated minimum wages. Let’s assume that studies by Card and Krueger, and others such as Katz, are accurate: higher minimum wages in the situations studied empirically in these papers did indeed increase, or not decrease, the number of jobs (or hours of employment) for low-skilled workers.  Let’s assume also that (1) no other difficult-to-observe terms of employment (for example, the strictness with which workers are worked per hour) are negatively affected by the minimum wage, and (2) the reason for these happy outcomes is employers’ monopsony power.

1. How general are these situations in which the straightforward predictions of the law of demand are overridden by the effects of monopsony power?  You say that those of us who are skeptical that minimum-wage legislation is a net benefit to low-skilled workers unscientifically dismiss as either mistaken or incomplete the empirical findings of these studies when we continue to generalize our understanding of the dominance of the law of demand to the market for low-skilled workers.  What is your proposed degree of generalization of your findings?  In your view, do these findings apply only to the particular places and time periods covered by the empirical studies that you find convincing?  Or do you propose that we – economists, citizens, and policy-makers – generalize these findings to cover other firms and industries that employ low-skilled workers and other time periods in which low-skilled workers seek jobs?

2. I live in October 2013 in Fairfax, Virginia.  Have careful empirical studies of the effects of minimum-wage legislation on the job prospects of low-skilled workers in October 2013 in Fairfax, Virginia, been conducted and, if so, have these studies found that a legislated minimum wage has no negative effects on these workers?  If no such studies of this particular labor market have been conducted, isn’t it unscientific to conclude that a higher minimum wage that affects low-skilled workers in October 2013 in Fairfax, Virginia is beneficial?  If I am unscientific in generalizing my understanding of the dominance of the law of demand to the market for low-skilled workers – and generalizing the conclusions of the many empirical studies that, consistent with the fundamental law of demand, do find that minimum-wage legislation shrinks the job prospects of low-skilled workers – aren’t you equally unscientific when generalizing your empirical findings to locales, firms, industries, and time periods beyond the particular ones that are the direct objects of your studies?

3. Given the fact that there seems to be no obvious reason to justify your generalization as opposed to my generalization, what principle do you propose that we employ to determine which of these two propositions – that the law of demand is dominant, or that monopsony power is dominant – is the best proposition to rely upon to make government policy that applies to all Americans?

4. Is the only labor market marred by monopsony power the market for low-skilled workers?  Is there no monopsony power (as you understand this force) in the market for semi-skilled or high-skilled workers?  If low-skilled workers are the only ones unfortunate enough to be employed by monopsonists, what is it about this labor market that generates monopsony power so uniquely?  If, in contrast, other labor markets too are infused with monopsony power, do you propose also a scale of minimum wages running up to, say, the wages of neurosurgeons and professional basketball players?

5. I’m sure you’ll agree that new firms that hire low-skilled workers start up frequently.  Are these start-up firms monopsonist employers of low-skilled workers?  Is the ready ability of these firms to hire low-skilled workers evidence of monopsony power in the market for low-skilled workers?  If so, how so?  If not, what becomes of your hypothesis that the market for low-skilled workers is marred by monopsony?

6. Do you infer monopsony power in the market for low-skilled workers from the fact that some (although hardly all) empirical studies of the minimum wage find either positive, or no negative, effects on the employment prospects of low-skilled workers?  Or do you have reasons independently of those studies to believe that employers of low-skilled workers enjoy monopsony power?  If the latter, what are those reasons?

7. Given your belief in the (apparently widespread, across time and space) existence of monopsony power in the market for low-skilled workers, what is your theory of the source of that monopsony power?  Surely it’s not collusion, so what is that source?  Relatedly, if such monopsony power exists independently of some government enforcement of such power, why do not you – who are convinced of the reality of this monopsony power – start your own firms to hire these workers?  You’d make a bundle if your theory of reality is accurate.

8. If employers of low-skilled workers do in fact have monopsony power in the market for low-skilled workers, what happens to the excess profits these firms enjoy as a result of exercising this monopsony power? Do these profits remain excess, period after period after period?  If so, do these firms also have some monopoly power to fend off new entrants who greedily would love to join in earning these streams of excess profits?  If so, what is the source of this monopoly power?

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