… is from page 534 of the great Armen Alchian‘s November 1957 lecture, delivered at the University of Chicago, “The Economics of Power,” as this lecture is reprinted in The Collected Works of Armen A. Alchian (2006), Volume 1:
The bedrock foundation for the economic power of a labor union is its monopoly position. Without that it could not enforce wages above a free entry competitive level, for if it tried to do so, non-union workers would offer to work at competitive wages, thus destroying the union scale. To enforce its higher wage rates, it must keep out the wage-cutting competitors – it must be a monopoly.
DBx: It’s deeply ironic that minimum wages are championed by labor unions. Unions, as Alchian notes, raise their member-workers’ pay only if and to the extent that unions prevent competitive forces from operating in labor markets. Yet the only coherent economic justification for minimum wages is the possibility that employers hold monopsony power in the market for low-skilled labor. (But remember: monopsony power is merely a necessary condition for minimum wages not to destroy or worsen jobs for some low-skilled workers; it isn’t a sufficient condition.)
Of course, in reality in modern America, the consistent presence of monopsony power in the market for low-skilled labor isn’t remotely plausible. It’s a possibility that is considered plausible only by academics and bureaucrats who have a poor understanding both of market processes and of history. The reason is that, if and to the extent that monopsony conditions actually emerge in reality despite the myriad different employers of low-skilled workers – and even if, unbelievably, most low-skilled workers consistently prove to be too risk-averse to initiate searches for better jobs – profit-seeking entrepreneurs would find ways to profit from these conditions and, thus, dissolve the monopsony power.
So unions succeed only by stifling competition among workers in labor markets – a stifling that, when unions succeed, is quite real. Yet unions’ calls for minimum wages are supported by some economists on the grounds that competition among employers in labor markets is stifled – a stifling that is, in reality, merely imaginary.
