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Indeed, Even a Mouse Has No Chance of Passing Through the Eye of A Needle

My great colleague Dan Klein (who spends his summers in Sweden) and I are having an enlightening and productive e-mail conversation – one launched by this post – about the meaning of “perfectly set” minimum-wage rates.  There’s much from this conversation that I hope to share eventually here at the Cafe, but for now my comments will be relatively brief.

Remember, according to economic theory there’s one and only one conceivable scenario in which a minimum wage will not reduce the employment prospects of low-skilled workers – namely, a scenario in which employers of low-skilled workers have monopsony power in the market for low-skilled workers.  Absent such monopsony power, raising the minimum wage will indeed harm some low-skilled workers, most likely by pricing some of them out jobs (but also, perhaps, by worsening the non-wage conditions of their jobs).  And remember also that such monopsony power is only a necessary condition for a legislatively set minimum wage not to cause harm to some low-skilled workers; such monopsony power is not a sufficient condition.

The point of this post is to emphasize one of the (many) reasons why monopsony power is not a sufficient condition to ensure that a legislatively set minimum wage will not harm some low-skilled workers.

That even the unambiguous possession of monopsony power by employers of low-skilled workers is an insufficient condition to ensure that a minimum wage will not cause harm to some low-skilled workers can most easily be seen by pointing out that an hourly minimum wage of, say, $100 per hour would nevertheless price many workers out of jobs.  These workers’ wages would fall from whatever are their current rates to $0.00 per hour.  Clearly, even with monopsony power, government can easily set the minimum wage too high – so high that the standard prediction of textbook economics will ring true in reality: higher unemployment.

Even under the most ideal conditions for minimum-wage legislation to work without reducing the employment prospects of some workers, the minimum wage must be set carefully.  Government must know not only that monopsony power exists in the market over which it wields its power, but know also that the minimum wage that it sets is not above the wage that would prevail in the absence of monopsony power.  (Again, a minimum-wage rate set above the wage that would prevail in the absence of monopsony power would unambiguously lower the quantity of hours of low-skilled labor demanded by employers.)

How likely is it, in practice, for government to know such a thing?  Not very.  While it’s easy to draw a graph of monopsony power that reveals the ‘optimal’ wage rate, it is, frankly, absurd to suppose that in practice government can calculate this optimal wage rate in order to ensure that the minimum wage is not higher than it.  In reality, ‘correct’ prices can only be discovered through actual competition among actual buyers and actual sellers who put their own actual property (including their own labor services) on the line.

But the practical problem with setting a ‘perfect’ (or just passably acceptable) minimum wage in fact is far worse than the above reveals.  Even in a realistic local jurisdiction in modern America – say, the City of Seattle, WA or Thibodaux, Louisiana – monopsony power, if it does exist, will exist in different magnitudes depending on the employer.  Such power will range along a continuum of nonexistence (for some employers of low-skilled workers) to, at the other extreme, perhaps significant magnitudes for other employers.  In between these extremes will be employers with different degrees of monopsony power.  (Remember: I’m here assuming, contrary to what I believe are the facts, that monopsony power does indeed exist in large enough magnitudes in modern America to make proffered economic justifications of minimum-wage legislation at least worthy of being heard.)

Because each local government is restricted in practice to imposing one (or at most two) minimum-wage rates within their respective jurisdictions at any one time, it is practically impossible not only for each jurisdiction to impose a perfect minimum wage, but also extraordinarily unlikely for any jurisdiction to impose any minimum wage that will not reduce the employment options of some (and perhaps many) low-skilled workers.  The ‘perfect’ minimum wage that causes, say, heavily monopsonized McDonald’s to employ more  low-skilled workers will almost certainly cause mildly monopsonized Harry’s Hometown Lawn Care service to employ fewer low-skilled workers, and unmonopsonized Luigi’s Local Pizzeria to cut back even further on the percentage of low-skilled workers that it employs.

Therefore, for this reason alone it is highly unrealistic to suppose that minimum-wage rates set by local governments are less likely than is a nationally set minimum-wage rate to cause some unintended harm to low-skilled workers.  If we grant for argument’s sake that monopsony power is in practice both real and a problem whose ill-consequences can be addressed only by government, it is correct to suppose that the typical local government has in its jurisdiction a narrower range of degrees of monopsony power among its employers than does the national government.  Yet it is an error of both logic and of practical observation to draw from this fact the conclusion that local governments can practically set minimum-wage rates that do not harms to low-skilled workers.

Put more pithily, the argument that a local government has a better chance of setting minimum-wage rates in ways that do not harm some low-skilled workers is logically akin to the argument that a walrus, being smaller than a blue whale, has a better chance than does a blue whale of swimming through the eye of a needle.  The chances of success in both sets of cases – for the walrus and the blue whale, each of which attempts to swim through the eye of a needle, and for a local government and a national government, each of which attempts to set a minimum-wage rate that does not harm some low-skilled workers – is zero.