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Even ‘Perfectly’ Designed Minimum-Wage Rates Would Be Harmful

Here’s a (slightly abridged) letter to a University of Wisconsin undergrad who tells me that he wants to earn his econ PhD at Princeton or MIT.

Mr. Marc Duval

Dear Mr. Duval:

Thanks for your kind e-mail….

To answer your question: I would still oppose minimum-wage legislation even if some miraculous means were devised to ensure that governments never erred in identifying the presence and degree of monopsony power, and if governments – by some means even more miraculous – could be confined to imposing minimum wages only when and where monopsony power were found to exist.*

Monopsony wages and prices (like monopoly wages and prices) play a role that is at least as important as that which is played by competitive wages and prices.  Monopsony wages are both a signal to entrepreneurs that some workers are currently underpaid in certain markets, and an incentive for these same entrepreneurs to move into those markets in order to profitably hire these underpaid workers away from their current employers.  The result is that the monopsony power is whittled away while these workers’ wages are competed upward.

Even perfectly designed and enforced minimum-wage legislation would not only thwart this potent market process of adjusting wages to their competitive levels, it would also reinforce the monopsony power that is the deeper problem.  While a ‘perfectly’ set minimum wage, therefore, would push wages up to their correct levels – and, thus, cure one ill symptom of existing monopsony power – such a minimum wage would also destroy the natural market signals and incentives that guide and fuel the competitive market forces that would otherwise extinguish the monopsony power itself.

In short, even ideal minimum-wage legislation would work as a shield to protect monopsony power.  Not good.

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

*And, I should add in addition, even if we could be assured – again, by some miracle – also that the only consequence of such a perfectly designed minimum wage would be higher wages for low-skilled workers (rather than some other response by employers, such as switching more heavily into labor-saving machinery and out of low-skilled labor).

Almost all minimum-wage advocates – even those who are trained in economics – miss this point about real-world competitive processes.