Kathy G has been repeatedly taking me to task for not linking her post on monopsony. I don't like to make a policy of linking to people who whine that I am not linking to them--indeed, rather the opposite. (Other new bloggers take note). But in this case, I actually tried to link to her; I just forgot to paste in the link, which I do all too often, a careless habit that I am trying to curtail. So, fair enough.
Another note to new bloggers: you've heard that "blogging is a conversation". Unfortunately too true. By the time you've been doing this for six years or so, you will often sort of forget that the conversation you are having now is not with the same people you were talking to four years ago. You will thus find yourself accidentally referring to past arguments as if everyone reading the current post had lived through them with you. Just as you do in a bar at 2 am when everyone's been arguing for a while, you will, without quite realizing it, make references that are only really comprehensible to a few long-time readers.
Case in point: in a post on the academic job market, I made a side reference to the minimum wage.
I hear economists on the left endorse a monopsony model of minimum wage employment that sounds frankly ludicrous to me, and should to anyone who has worked in fast food or retail--how could employers in industries that fragmented, with turnover rates well over 100%, possibly collude? On the other hand, it's a pretty plausible model for academic environments where a squillion graduate students are all chasing three jobs.
When I wrote this I was thinking of a very long-ago debate that raged through blog comments on my very first blog, the one with the eye-searing candy-colored pastel boxes, using an extremely buggy comment system that I don't even think exists any more. Back then, we didn't have all these bells and whistles that you ungrateful kids take for granted--why, I had to carry water for the comments uphill three miles, and then boil it over an open fire . . .
I'm sorry, where was I? Right, the minimum wage.
The funny thing is that I had lunch with Tyler Cowen the other day, and he actually remembered the debate, and caught the reference when I made it the first time--blogging is a long-term conversation with at least a few readers. But Kathy G. can be forgiven for not having had the exquisite good taste to read my blog way back when.
For those who haven't following along at home, this was an argument over whether the minimum wage market is appropriately described by a monopsonistic model of labor employment. Monopsony, if you fell asleep in Micro 101, is monopoly's evil twin brother: it's what happens when you have a single buyer rather than a single seller. As with monopoly, much un-hilarity ensues.
The reason we were arguing about this is a very famous (to econowonks) study done by Card and Krueger on minimum wage employment in Pennsylvania and New Jersey following a minimum wage increase in New Jersey. Their counterintuitive finding was that employment actually rose in New Jersey.
There are several possible explanations for this divergence from the standard finding that demand curves are downwards-sloping.
1. It was a statistical outlier
2. There was some swamping effect in New Jersey, like a local economic boom.
3. The study was not well done
4. Fast-food employment is monopsonistic, at least in Pennsylvania and New Jersey.
Ignore the first two; it would be fiendishly difficult to establish the truth of either proposition. Let's tackle number four first, because this is the heart of the debate that I was having with a number of people four years ago, and with Kathy G. now. Consider a classic model of minimum wage employment in a simple model where all workers are paid the same wage:
When you institute a price floor, the wage goes up, but the number of people employed goes down.
Under monopsony, things look different. Competitive employers have to offer a market wage, so they maximize production where the market wage is equal to the marginal product of a new worker. Monopsony employers, on the other hand, are not price takers; they can set the wage to maximize their profit. This means that they face an upward sloping marginal cost curve for workers, because raising the wage in order to hire another worker also means raising the wages they pay to their existing workers.
As I hope is easy to see from the graph above, which I shamelessly ripped off from Wikipedia, either a market wage or a minimum wage essentially gives you a horizontal marginal cost curve. Those employers simply pay the wage where MPR=S. But if they are monopsonists who control the wage, then they can probably maximize their profit with fewer workers, because they are only competing with staring home and staring at the wall. They maximize profit not by setting wages where MRP=S, but where MRP=Marginal Cost. That means a smaller workforce.
This looks sort of counterintuitive--why would the marginal cost be higher than the wage? But that's because they have to raise the wages of all the other people as well--thus, marginal cost increases faster than the wage. That's why the company can be better off having a smaller workforce at a lower wage than a bigger workforce at a higher wage, even if the marginal revenue produced by the additional worker is higher than their wages.