Monopsony and Minimum Wages

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Chapter 9

• Monopsony and Minimum Wages

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• Introduction
• Meaning of monopsony
• Classic meaning one buyer of labour power
• Meaning used here when firm has market power
  over workers
• Market power manifested as an upward sloping
  labour supply curve faced by a firm (compare
  labour supply under competition with labour
  supply under monopsony
• Wage and employment under conditions of monopsony
• Examples of monopsony
• Pullman, Illinois was a company town during the
  late 1800ds. Mining and Steel towns in Penn.,WV,
  and Northeastern Aus. Towns surrounding textile
  mills in the Southern US and Northwest England.

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• Essential characteristics of monopsony
• Firm has upward sloping labour supply schedule
• It must pay a higher wage if it wants more
  workers (it must pay the higher wage to all
  workers, not just the last one hired)
• The Marginal Labour Cost (MLC) is above and
  steeper than the supply curve.
• If the firm hires a new worker it must pay a
  higher wage to the new worker and a higher wage
  to existing workers, thus MLC is greater than the
  wage.
• Compare to MLC under perfect competition
• Firm maximizes profits by hiring workers until
  MRPMLC and paying according to the Supply Curve

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• Important Points
• Workers being paid at rate that is less than MRP
• Wage and employment less than under competition
• An increase in a minimum (or union-bargained)
  wage can lead to an increase in employment and a
  reduction in exploitation
• A minimum wage serves as a constant MLC wage,
  which offers incentives to hire more workers.
• If wages go too high, the negative association of
  wages and employment re-emerges (riding up MRP
  schedule)

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• Where does monopsony exist? Are wages affected by
  monopsony as the theory would predict?
• Geographic monopsony
• Not as important today because workers can move
  more easily
• Situation where workers less mobile leads to more
  monopsony power (pg 225)
• What makes workers less mobile?
• Consider a university town beginning professors
  quite mobile, experienced professors and spouses
  of professors less so, clerical and other types
  of workers are also less mobile. Thus
  universities in such towns may have monopsony
  power over some types of workers

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• Government as monopsonistic employer
• Government is often only (or major) employer of
  police, firefighters, school teachers
• Does this allow government to exploit such
  workers?
• Evidence suggests only a modest effect
• The reason may be that the elasticity of demand
  (related to slope of MRP schedule) is quite
  inelastic
• Because demand for such workers does not respond
  much to prices, which implies high levels of
  bargaining power, employers are not able to pay
  much below what workers wouldve obtained under
  competitive conditions

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• Dynamic Monopsony
• Classical monopsony presupposes a spot-market for
  labour
• Price and terms of employment not like a spot
  market
• Workers hired, build lasting relationships with
  employers,
• Long relationships forged because of high search
  costs for workers
• Firms know that workers are not constantly
  searching for other jobs, so during the current
  period, and likely in future periods, the firm is
  the only employer for its current workers
• Dynamic monopsony because monopsony power relies
  on commitment of workers to a firm that is
  expected to last many periods
• Degree to which firms can exploit monopsony power
  is limited.

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• Firms can pay different wages for the same work
• Employer size wage effect
• Firms can discriminate and not be driven out of
  business
• Monopsony and Minimum Wage Laws Because two
  competing models yield different predictions
  about minimum wage policy, it becomes an
  empirical issue.
• Card and Krueger Natural Experiment Study

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Minimum Wages

• Card and Krueger Fast food in Penn and NJ
• Background
• Penn and NJ have a common border
• In April, 1992 minimum wage in NJ was increased
  to 5.05/hr. The minimum in Penn was still
  4.25/hr
• Fast food industry is convenient because of
  homogenous prices, products, and employment
  processes, besides they pay min. wages and, there
  are no tips involved, they cooperate with phone
  interviewers

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Natural Experiment

• The policy change sets up a natural experiment,
  where Penn is a control group and NJ is the
  experimental group
• Restaurants Burger, KFC, Wendys, Roy Rodgers
• First interview March 1992 a month before the
  min. wage went into affect (n410)
• Second interview November/December, 1992, about
  six months after the policy change (n409)

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Results

• Table 2
• FTE up in NJ and down in Penn
• Starting wage about the same before, after wage
  is higher in NJ
• Prices increased in NJ and stayed roughly similar
  in Penn
• Table 3 (Difference in Difference approach)
• Difference after and before for two states, then
  difference in the differences (relative gain for
  NJ of 2.76 FTE workers, t2.03)

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Regression Results

• The equation is
• Table 4
• The NJ dummy suggests an increase in employment
• So does the GAP variable suggest an increase
  employment
• Most of the estimates are statistically
  significant

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Other results

• What about prices?
• Prices rose in NJ relative to PA by about 4
  percent
• But prices didnt rise more at the stores that
  had the lowest initial wages