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Monopsony Power, Schmonopsony Power

Here’s a letter to a young guy who plans to do graduate work in economics:

Mr. A___:

Thanks for your e-mail. In it, you write that my argument against minimum wages is “weak given it ignores monopsony power.”

You’re correct that I didn’t mention monopsony power in that essay. This omission, however, does not, I think, weaken my argument.

First, even in this age of Covid I find implausible the assertion that employers have monopsony power in the market for low-skilled labor. And in normal times – which, let us hope, return soon – the assertion of the existence of such monopsony power fails the smell test.

Second, even if employers do possess monopsony power, minimum-wage legislation does nothing to solve the problem. At best such legislation treats one lone symptom – namely, low money wages. Yet employers can adjust the terms of the labor contract on many different margins. (See this new paper by Jeffrey Clemens.) Therefore, artificially ‘curing’ the symptom of low money wages will only artificially worsen other, less-visible but no less real symptoms.

Pushing wage rates higher will result in workers who remain employed suffering a reduction in fringe benefits, an increase in work demands, or some mix of the two. And because even employers with monopsony power have every incentive to offer that mix of wage and non-wage benefits that’s most appealing to the workers they wish to employ, minimum wages harm low-skilled workers even when employers possess monopsony power.

There is, I’m afraid, no plausible economic case for minimum wages even if monopsony power were rampant.

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