Monopsony and the Minimum Wage

We have actually seen that weras will be lower in monopsony than in otherwise comparable competitive labor sectors. In a competitive market, workers obtain wages equal to their MRPs. Workers employed by monopsony firms receive wperiods that are much less than their MRPs. This fact says sharply various conclusions for the analysis of minimum weras in competitive versus monopsony conditions.

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In a competitive industry, the implace of a minimum wage above the equilibrium wage necessarily reduces employment, as we learned in the module on perfectly competitive labor sectors. In a monopsony market, yet, a minimum wage over the equilibrium wage could increase employment at the very same time as it increases wages!

Figure 14.5 mirrors a monopsony employer that faces a supply curve, S, from which we derive the marginal variable cost curve, MFC. The firm maximizes profit by employing Lm units of labor and also paying a wage of $4 per hour. The wage is listed below the firm’s MRP.


Figure 14.5. Minimum Wage and Monopsony. A monopsony employer faces a supply curve S, a marginal element cost curve MFC, and a marginal revenue product curve MRP. It maximizes profit by employing Lm systems of labor and paying a wage of $4 per hour. The imposition of a minimum wage of $5 per hour provides the daburned sections of the supply and MFC curves irrelevant. The marginal factor price curve is therefore a horizontal line at $5 up to L1 units of labor. MRP and also MFC now intersect at L2 so that employment rises.

Now intend the government imposes a minimum wage of $5 per hour; it is illegal for firms to pay less. At this minimum wage, L1systems of labor are gave. To acquire any kind of smaller amount of labor, the firm need to pay the minimum wage. That means that the area of the supply curve mirroring amounts of labor gave at wperiods listed below $5 is irrelevant; the firm cannot pay those wperiods. Notice that the area of the supply curve listed below $5 is shown as a damelted line. If the firm desires to hire more than L1units of labor, but, it should pay wages provided by the supply curve.

Marginal aspect cost is influenced by the minimum wage. To hire extra devices of labor up to L1, the firm pays the minimum wage. The added price of labor past L1continues to be provided by the original MFC curve. The MFC curve hence has 2 segments: a horizontal segment at the minimum wage for quantities as much as L1and also the solid portion of the MFC curve for amounts beyond that.

The firm will certainly still employ labor approximately the suggest that MFC amounts to MRP. In the case shown in Figure 14.5, that occurs at L2. The firm for this reason increases its employment of labor in response to the minimum wage. This theoretical conclusion received apparent empirical validation in a study by David Card and Alan Krueger that suggested that an increase in New Jersey’s minimum wage may have actually raised employment in the fast food sector. That conclusion came to be a critical political tool for supporters of an increase in the minimum wage. The validity of those outcomes has come under major obstacle, however, and the fundamental conclusion that a higher minimum wage would increase joblessness among unexpert workers in many cases stays the place of a lot of financial experts. The discussion in the Case in Point summarizes the conflict.


In a competitive labor market, a rise in the minimum wage reduces employment and rises unemployment.A minimum wage can rise employment in a monopsony labor sector at the same time it boosts wages.Some economic experts argue that the monopsony version characterizes all labor industries and also that this justifies a nationwide boost in the minimum wage.Many financial experts argue that a nationwide rise in the minimum wage would certainly reduce employment among low-wage employees.

Case in Point: The Monopsony-Minimum Wage Controversy

While the imposition of a minimum wage on a monopsony employer could boost employment and also weras at the very same time, the possibility is generally concerned as empirically unimportant, provided the rarity of cases of monopsony power in labor markets. However before, some studies have discovered that boosts in the minimum wage have brought about either boosted employment or to no significant reductions in employment. These results appear to contradict the competitive design of demand and also supply in the labor industry, which predicts that a boost in the minimum wage will certainly cause a reduction in employment and an increase in joblessness.

The study that sparked the dispute was an analysis by David Card and Alan Krueger of employment in the rapid food sector in Pennsylvania and New Jersey. New Jersey boosted its minimum wage to $5.05 per hour in 1992, when the nationwide minimum wage was $4.25 per hour. The two economists surveyed 410 rapid food restaurants in the Burger King, KFC, Roy Rogers, and also Wendy’s chains just prior to New Jersey enhanced its minimum and again 10 months after the rise.

Tright here was no statistically substantial readjust in employment in the New Jersey franchises, but employment fell in the Pennsylvania franchises. Thus, employment in the New Jersey franchises “rose” family member to employment in the Pennsylvania franchises. Card and also Krueger’s outcomes were commonly taken as mirroring a boost in employment in New Jersey as a result of the rise in the minimum wage tright here.

Do minimum wages reduce employment or not? Some economists understood the Card and also Krueger results as demonstrating widespread monopsony power in the labor industry. Economist Alan Manning notes that the competitive model indicates that a firm that pays a penny much less than the industry equilibrium wage will have zero employees. But, Mr. Manning notes that tbelow are non-wage attributes to any job that, together with the cost of altering tasks, bring about individual employers encountering upward-sloping supply curves for labor and also thus offering them monopsony power. And, as we have actually seen, a firm through monopsony power may respond to a boost in the minimum wage by raising employment.

The obstacle with implementing this conclusion on a national basis is that, even if firms execute have actually a level of monopsony power, it is impossible to recognize just how much power any type of one firm has and by exactly how a lot the minimum wage could be increased for each firm. As an outcome, also if it were true that firms had such monopsony power, it would certainly not follow that a rise in the minimum wage would certainly be proper.

Even the finding that a rise in the minimum wage might not reduce employment has actually been referred to as into question. First, there are many type of empirical research studies that indicate that rises in the minimum wage do mitigate employment. For example, a current research of employment in the restaurant market by Chicago Federal Reserve Bank financial experts Daniel Aaronson and also Eric French concluded that a 10% rise in the minimum wage would certainly mitigate employment among unprofessional restaurant workers by 2 to 4%. This finding was even more in line through other empirical work-related. Additional, economic experts point out that tasks have actually nonwage aspects. Hours of job-related, working conditions, fellow employees, health and wellness insurance, and also various other fringe benefits of working have the right to all be readjusted by firms in response to a rise in the minimum wage. Dwight Lee, an economist at the University of Georgia, argues that as a result, a rise in the minimum wage may not reduce employment but may reduce other fringe benefits that workers worth more highly than weras themselves. So, a rise in the minimum wage might make even workers who obtain higher weras worse off. One indicator that argues that better minimum wperiods may minimize the welfare of low revenue workers is that participation in the labor force by teenagers has actually been shown to loss as an outcome of higher minimum wages. If the possibility to earn better wperiods reduces the variety of adolescents seeking those wperiods, it may indicate that low-wage job-related has become much less desirable.

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In short, the opportunity that greater minimum wages can not alleviate employment among low-wage workers does not necessarily mean that greater minimum weras improve the welfare of low earnings workers. Evidence that casts doubt on the proplace that better minimum wages mitigate employment does not remove many type of economists’ doubt that better minimum weras would certainly be a great policy.