A Voice of Experience On the Question of the Reality of Monopsony Power

by Don Boudreaux on September 20, 2015

in Competition, Hubris and humility, Myths and Fallacies, Seen and Unseen, Work

Below is an unsolicited e-mail from my friend Mike Long.

Mike is a successful businessman in California.  Mike is the business person who has generously offered to extend, free of charge, business advise to any academic who – convinced that monopsony power exists in quantities and in a manner sufficient to justify government-imposed minimum wages – would wish personally to profit from the existence of this monopsony power.  Astonishingly, not a single believer in monopsony power has stepped forward so far to put his or her own money where his or her mouth is.*  Such believers in monopsony power are content to cowardly put at risk the livelihoods only of other people – namely, of low-skilled workers.

I propose that from now on anyone who asserts the existence of monopsony power as a justification for minimum-wage legislation be treated as would be a person dressed as a wizard standing on the observation deck atop the Empire State building and who, while himself offering excuses for his stubborn refusal to move from his perch, vigorously encourages other people to leap off of the building with the assurance that the law of gravity in that part of Manhattan is suspended by mysterious forces.  Unless and until the wizard himself is willing to leap off of the building, no one should take seriously the wizard’s fancy-talk about the suspension of the law of gravity in that part of Manhattan.

Anyway, here’s Mike’s e-mail to me, shared with you in full and with his kind permission:

Hi Don,

I’m sure you are familiar with the basic process a company goes through in order to hire even the lowest skilled worker.  I’m in complete agreement with your recent blog posts on how companies compete with other companies for workers.   From my perspective this is a process that by its very nature demonstrates that no firm really has monopsony power in the labor market.

I’ve hired hundreds of workers, and I’d like to share with you the process my company would typically go through regardless of whether it is for an unskilled or a highly skilled position.

1.  First step is to advertise the position in the appropriate media.  In the past this would be local newspapers or trade journals, today it is most likely one of the many sites such as Monster.com that cater to both companies and the individual seeking a job.  For even unskilled jobs you will typically invest $100’s of dollars in advertising.  And note that it is the company who typically pays to advertise and the individuals seeking jobs use the site for free.

2.  The next step is someone at the company has to review the 10’s or 100’s of resumes that arrive.  Even for low skilled jobs where an individual comes to the company and fills out an application someone has to look at it.  The cost in time to review these applications, even for low skilled positions can be measured in many hours (i.e. $100’s of dollars).

3.  After the screening process in step 2 a select number of candidates are chosen to be interviewed.  The interview process itself will also cost $100’s of dollars in the time cost of the company employee’s who do the interviews. Once a decision is made then references have to be checked (even for unskilled jobs) or perhaps a drug test is paid for.

4.  It is now time to decide what to pay the lucky winner of this process.  Note that by now several weeks have passed by and a position necessary for the efficient operation of the business has gone unfilled.  How is the salary or wage to be offered determined?  The company has already invested several thousand dollars in the process and lost many weeks of productivity from the unfilled position.  It has also, by the nature of the process, identified an individual who most likely is a great candidate for competitors or other companies with similar jobs.  What we did, and what all companies typically do is seek out the best available data for what the going market rate is for that job in the local geographical area.  And that labor rate includes all the typical fringe benefits that companies will offer (medical insurance, paid vacation, etc.). This data is available from a number of sources (its not free) and is typically updated several times per year.  Frequently companies will lower the cost of acquiring the data by supplying the firms who compile the data their salary data for each category of worker.

5.  Once an appropriate offer is prepared it is presented to the chosen candidate and you hope they accept it.  Or if they’ve done their homework they may come back and say, “well, nice offer but company X, located closer to my home is paying 25 cents an hour more, can you match it?”  From the companies perspective, they want, in fact they need, someone who can start as soon as possible and will be happy and stay in the job long enough to pay for all the costs of hiring them and then training them.  Note that no matter how unskilled the job is, the way burgers are flipped at Burger King is different then the way it’s done at McDonalds so there is always some training involved.

6.  Note also that once an unskilled worker has even a few months of experience they become a target to be hired away by other companies with similar jobs.  Because now that unskilled worker had demonstrated they can show up for work, get the job done and people are willing to put up with them.  Takes all the risk out of hiring a complete unknown.

It is not the company which has monopsony power in the labor market.  Rather it is the worker who tremendous negotiating leverage over the company.

Regards,
Mike

In his response to me after I asked permission to share the above, Mike added the following:

Hi Don,

Yes you may post it.  When I read your blog posts and pointers to other blogs that described how companies compete with each other for workers it reminded me of how difficult the hiring process is and how important it is for any company.  When you hire someone, regardless of the position, it is not only an investment in time and training but you are also taking the risk that individual will be accepted and not be disruptive to the organizations social cohesiveness.  This is not an insignificant risk and one reason companies prefer to hire someone who is already employed and has demonstrated that they are socially acceptable in the work force and can be trained.  As you have pointed out this is one reason why minimum wage laws are so detrimental to the unskilled worker who has no experience.  They are prevented from demonstrating their suitability to participate in the complex social environment any company represents.

I have probably mentioned to you before what are the only three interview questions; any other question is simply a variation of one of these.

1.  Can you do the job?
2.  Do you want the job?
3.  Can we put up with you?

That third one is just as important as the first two.

Mike

….

* Mike’s offer remains open.  Any economist (or whoever) out there who is convinced that monopsony power infects the market for low-skilled workers in a way that would render the imposition of a minimum wage harmless to all low-skilled workers can (1) personally profit by starting a business to seize this profit opportunity, and (2) in doing so help to raises the wages of the low-skilled workers.  Just contact me at dboudrea@gmu.edu and I’ll put you in touch with Mike.

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