Tuesday, August 18, 2015

A few more thoughts on monopsony and the minimum wage (and what I think is a much stronger post from Don)

In the last post I noted that monopsony is definitely not the only and not even really the best theoretical argument for why we see no disemployment effects. Commenters made this point too, including YouNotSneaky, who regularly highlights the limits of the dynamic monopsony model as an explanation. (S)he is correct that dynamic monopsony is not sufficient and does not automatically imply that a minimum wage will raise employment, but my standard is somewhat different than that. None of these explanations automatically imply anything, the question is whether they seem to be plausible explanations. We have work that suggests there is monopsony power in low wage labor markets, and we know that under certain conditions (but not all conditions) dynamic monopsony can explain the no disemployment effect result, so it seems reasonable to me to keep it on the table.

I'm not a theory guy so it would take some time to review and walk through the models, but there's plenty of material out there if you're looking for the conditions under which monopsony does and doesn't provide this result. Manning runs simulations on his model with Dickens and Machin on pages 340-347 in Monopsony in Motion and shows what parameters produce a no disemployment result and which ones produce a big disemployment effect. Critically, none of them show much of an effect when the minimum wage shock is small. Bhaskar and To (1999) have similar "it depends on the parameters" results, as do a few other papers. A lot of this doesn't just depend on the parameters but the source of the monopsony power itself. Search models seem to be more problematic for getting the result than product differentiation models (I noted both sources of market power in the prior post).

YouNotSneaky is particularly interested in what monopsony can definitively tell us. I come at it from the other direction: when I see good studies showing no disemployment effect my conclusion is that I have to accept monopsony (with the right parameters) as a decent candidate explanation to keep on the table.

I wanted to share a discussion of these issues from Manning's 2003 book on the subject that I think drives this perspective home:

Finally, I wanted to bring attention to a new post from Don (and apparently more are coming) that I think is much stronger than the prior posts. He notes that if we think that firms exercise market power over their workers they should be able to price discriminate. If they can price discriminate it gives them some latitude to continue to higher more workers at higher wages and approach the competitive wage level for those new workers. The price discrimination capacity here is key because if the workes who are paid at (or I suppose "near" will work) their reservation wages increase their wages too then it's not a profit maximizing move to hire new workers up to the competitive wage. I think this is a really good and reasonable point. I also find it interesting because it (I think - this is just off the top of my head) provides a nice explanation for the spike in the wage distribution at the minimum wage that Manning suggests is a puzzle to a number of different models. The logic would be that before the minimum wage increase there are a lot of people employed for less than their marginal product, they're kept on when the minimum wage goes into effect because the increase is still less than their marginal product, but they're all now bunched at the minimum wage level until the curves shift again and the distribution smooths out. I'm not 100% sure if this actually works out but it seems sensible.


  1. In the last post I noted that monopsony is definitely not the only and not even really the best theoretical argument for why we see NO disemployment effects.

  2. "We have work that suggests there is monopsony power in low wage labor markets" - can you point me to this? And the work needs to establish monopsony directly rather than consist of the argument "we don't see minimum wages affect employment therefore the market is monopsonistic", which would be circular (I haven't seen you make this mistake but it can be frequently encountered when one reads this stuff)

    I actually really don't believe that there's "classic" monopsony or even "monopsonistic competition" in the low wage industry. This is based on personal experience and just plausibility. A Burger King job is pretty much the same as a McDonalds job is pretty much the same as a Dairy Queen job and any town of decent size will have plenty of those.

    I do like the Bhaskar and To model (I tried to write one down like it once and then found that somebody - these guys - had already done it) but I don't think it has much empirical relevance.

    I don't have ready access to Monopsony in Motion.

  3. To clarify my position a bit, I do believe that one can find instances of labor markets where employers face an "upward sloping labor supply curve". The basic efficiency wage model, or the basic search model will give you that. But an "upward sloping labor supply curve" is basically a *necessary* not a *sufficient* condition for minimum wages to increase employment. If there's lots of firms in the market and they all face an upward sloping labor supply curve then that won't work - like in the efficiency wage model where a minimum wage will still lower employment even when employers have some "monopsony power".

    What makes it work - minimum wage increasing employment - is the very fact that there is only *one* firm facing an upward supply curve so there's no effect of it's choice on other firms and feedback.

  4. Ugh, that should be "what makes it work - minimum wage increasing employment - IN CLASSIC MONOPSONY SITUATION is the very fact.."


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