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A Note on Minimum Wages and Monopsony Power

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I’m sure that the following, brief point must have been made before; perhaps I myself have made it (although, if the latter, I’ve forgotten).  Nevertheless, it’s worthwhile to make once more this particular point about the relation between minimum-wage legislation and monopsony power.  I make the point below the fold.

The existence of monopsony power supplies the only theoretically credible condition under which a minimum wage can possibly improve the well-being of low-skilled workers without harming any of them.  Of course, however, claims that monopsony power is in reality rampant enough in the United States to justify minimum-wage legislation are incredible.  These claims fail the smell test.

But – and here’s the point of this post – to the extent that temporal or geographic pockets monopsony power might arise in reality, once source of such power might well be minimum-wage legislation itself.  The reason is that minimum-wage legislation destroys jobs for low-skilled workers.  Such legislation encourages employers to use more capital relative to low-skilled labor than they would use absent such legislation.  With fewer job opportunities created for low-skilled workers, low-skilled workers in their current jobs have fewer alternative jobs to which they might move if their current employers underpay them.

Therefore, any empirical studies that find evidence of monopsony power cannot legitimately be used to justify minimum-wage legislation if such studies are of places in which minimum-wage legislation already exists.  Such findings, if legitimate, likely reflect, at least in part, the anti-competitive effects of minimum-wage legislation itself.  To prescribe more of it under such circumstances would be counterproductive.

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