… is from page 204 of the late, great Columbia University economist Donald Dewey’s superb 1975 intermediate price-theory text, Microeconomics: The Analysis of Prices and Markets:
If the upward pressure on wages that a labor union [or a minimum-wage mandate] applies to a monopsonist is not, in the long run, to cause unemployment, then the monopsonist must also have the monopoly power in the market for his final product that earns him an economic rent.
DBx: This point is a simple and straightforward one, but it’s almost completely ignored by proponents of minimum wages. So it’s imperative to repeat that monopsony power in the market for low-skilled workers, while necessary, is not sufficient for minimum wages to not cause a reduction in low-skilled workers’ job opportunities; what’s also necessary is that (1) monopsonist employers also enjoy monopoly power in selling the outputs that they employ their underpaid workers to produce, and (2) the minimum wage not be raised too high. Employers with monopsony power over inputs such as labor, but without genuine monopoly power in their output markets, will not earn the excess profits out of which the higher labor costs of minimum-wage legislation must be paid if such legislation is to cause no reduction in low-skilled workers’ job opportunities.
As unrealistic as is the claim that employers of low-skilled workers in America enjoy widespread monopsony power, even more unrealistic – unrealistic to the point of being utterly unbelievable – is the claim that markets in which low-skilled workers are widely employed are marked by a combination of monopsony power and monopoly power. Yet, without this fanciful combination in reality, minimum wages will certainly reduce low-skilled workers’ employment opportunities.