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Powerful Empirical Evidence Against the Monopsony-Power Justification for Minimum Wages

Saturday, January 14, 2017 8:41
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(Don Boudreaux)


From a report in today’s Washington Post on an effort by the government of Montgomery County, Maryland, to make it illegal for anyone who cannot produce at least $15 per hour for an employer in that county to be employed profitably in that county raise that county’s minimum wage to $15 per hour:

One of [County Executive Ike] Leggett’s principal objections to the Elrich bill [to raise the minimum wage] is the time allotted for phasing in the rise to $15. Leggett has said he wants an extension from 2020 to 2022 to minimize disruption or hardship for businesses.

Note: if the only theoretically sensible economic justification for minimum wages held here in reality – namely, that employers in Montgomery County, MD, possess monopsony power in the market for low-skilled labor – there would be no need for gradualism in raising the minimum wage.  If the geniuses who rule Montgomery County have accurately determined that monopsony power over low-skilled labor exists in that (very wealthy) county, and that a minimum wage of $15 per hour is indeed the wage that results in ‘correct’ outcomes that mimic those of a competitive labor market, the there is no reason not to raise the minimum wage to $15 immediately.  Under these conditions, there would be no economically relevant “disruption or hardship for businesses.”  Sure, businesses would suffer reduced profits, but those profits (by assumption) are excessive; the hike in the minimum wage would simply transfer these excess profits from the monopsonist employers to low-skilled workers, the latter of whom would experience both higher wages and more job prospects as as result of the minimum-wage hike.

Looked at differently, the very fact that some of Montgomery County’s rulers are worried about economy-damaging business ‘disruption’ if the minimum wage is raised immediately and in a single leap to $15 per hour, is strong evidence that minimum wages are not intended to correct for the alleged ‘market failure’ of monopsony power.  And this evidence, in turn, suggests that the minimum-wage increases in Montgomery County, no matter how gradually imposed, will indeed reduce employment option for low-skilled workers.


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