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New York Times Reports Evidence Against Monopsony Power

Posted By Don Boudreaux On February 16, 2014 @ 1:49 pm In Reality Is Not Optional,Seen and Unseen,Work | Comments Disabled

Here’s a letter to the New York Times:

You report that higher minimum-wage rates in Oregon, Washington State, and Nevada prompt many Idahoans to quit jobs in their home state in order to take higher-wage jobs in these nearby states – jobs that these low-wage workers living in Idaho drive long distances to perform (“Crossing Borders and Changing Lives, Lured by Higher State Minimum Wages [1],” Feb. 16).  Despite failing to ask if Oregonian, Washingtonian, and Nevadan workers with even fewer skills are displaced by the migrating Idahoans, your report nevertheless offers strong evidence that the most analytically sophisticated economic theory used to justify minimum-wage legislation does not apply in reality.

That theory requires that employers have ‘monopsony power’ over their low-skilled workers.  If monopsony power exists, workers are stuck in their current jobs.  Employers can then keep wages artificially low without causing their workers to quit.  And yet as you report, not only do many low-skilled workers quit lower-paying jobs for higher-paying ones, they do so even if those higher-paying jobs are located many miles away.

This fact is powerful evidence that monopsony power does not infect labor markets – and, hence, that the economic theory used to argue that minimum-wage legislation does not much reduce employment is far weaker than its enthusiasts suppose it to be.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030​

Note also the following passage from this NYT report (bold added) – a passage that reveals that employers respond to mandated higher costs of employing workers not only by hiring fewer hours of work but also by adjusting on other margins, such as demanding harder work per hour from those workers who do remain employed:

Ms. Lynch’s story illustrates some of the competing narratives of the minimum wage debate. When she took her Oregon job last year, at an Irish-themed restaurant and bar called Mackey’s, she got more hours at higher pay, allowing her to compete in more barrel racing events, her rodeo specialty. Two months ago, she even bought a second horse, a gelding paint named Blue Duck.

But Mackey’s owners also told her that she would have to work harder than before for that money. Higher labor costs meant getting rid of the dishwasher, for one thing, said Angena Grove, who owns the restaurant with her husband, Shawn. And whereas Ms. Lynch covered three tables at a time in her old Idaho job, Mackey’s waitresses, with the owners helping out, cover five.

“You work for the money,” Ms. Lynch said.

UPDATE: I thank my colleague Dan Klein for suggesting a slight but clarifying change in the wording to the concluding paragraph of my letter.

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[1] Crossing Borders and Changing Lives, Lured by Higher State Minimum Wages: http://www.nytimes.com/2014/02/16/us/crossing-borders-and-changing-lives-lured-by-higher-state-minimum-wages.html

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