Visitors Now:
Total Visits:
Total Stories:
Profile image
By Cafe Hayek (Reporter)
Contributor profile | More stories
Story Views

Now:
Last Hour:
Last 24 Hours:
Total:

Monopsony ≠ Monopoly

Sunday, November 6, 2016 10:02
% of readers think this story is Fact. Add your two cents.

(Before It's News)

(Don Boudreaux)

Tweet

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 are mistaken.  Monopsony power 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 input markets (such as for labor) 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 means fewer jobs for low-skilled workers.*

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
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.

Report abuse

Comments

Your Comments
Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

Top Stories
Recent Stories

Register

Newsletter

Email this story
Email this story

If you really want to ban this commenter, please write down the reason:

If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.