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Monopsony ≠ Monopoly

Here’s another letter to the Wall Street Journal on the shoddy economics in Jason Furman’s and Alan Krueger’s recent essay:

Jason Furman and Alan Krueger suggest that if employers have monopsony power over low-skilled workers, minimum wages won’t cast some of these workers into the ranks of the unemployed (“Why Aren’t Americans Getting Raises? Blame the Monopsony,” Nov. 4).  They’re mistaken.  Monopsony power in labor markets is merely a necessary condition for minimum wages not to cause unemployment; it is not a sufficient condition.  Another necessary condition is monopoly power in output markets – power that even Messrs. Furman and Krueger would surely not dare suggest is possessed by restaurants, retailers, and other employers of most low-skilled workers.

By depressing workers’ pay, monopsony power enables firms to produce outputs at costs lower than would prevail in the absence of such power.  Yet because monopsony power in labor markets does not give firms monopoly power in output markets, competition in output markets leads employers with monopsony power to pass along these lower costs to consumers in the form of lower output prices.  In short, output-market competition ensures that even employers with monopsony power have no excess profits out of which to pay higher wages to all of their workers.  Therefore, because minimum wages raise employers’ costs above their revenues, competition in output markets drives these employers to reduce production until output prices rise again to levels that cover costs.  This reduced production destroys jobs for some low-skilled workers.*

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

* It’s true, of course, that in response to a minimum wage employers and employees can agree to change the nature of the jobs – to change jobs in ways that make them worse for workers, or (what is really the same thing) to reduce the value of workers’ fringe benefits.  To the extent that such changes occur, fewer jobs than otherwise will be destroyed.  Indeed, in principle, it’s possible for no worker to be cast into the ranks of the unemployed by a minimum wage.  But because the nature of the jobs would be changed for the worse, many low-skilled workers would nevertheless be harmed by the minimum wage.


If any intermediate-microeconomics student at George Mason University wrote an essay such as this one by Furman and Krueger, that student would receive for that paper a well-deserved grade of “F.”