In short, monopsony power in labor markets keep workers underpaid. With all those underpaid workers out there--and because there are no government-enforced prohibitions on starting companies that employ low-skilled workers--a true believer that monopsony power is a prevalent reality can profit by exploiting this pool of underpaid workers. Yet they do not. They remain in their faculty offices writing papers and issuing commentary. I continue to insist that this inaction is sufficient evidence against the proposition that monopsony power prevails in the market for low-skilled workers--and, hence, conclusive evidence that the higher the minimum wage, the worse are the job prospects of low-skilled workers.
. . .
So here's my empirical finding-one that I believe is rock-solid. The fact that nearly all economists who claim to believe in the prevalence of any sort of monopsony power in the U.S. labor market make no efforts personally to exploit this alleged profit opportunity-either directly or by somehow selling their advice to experienced entrepreneurs-is real and powerful empirical evidence that such monopsony power does not exist. I have a high degree of confidence in this empirical finding.
I agree with Don that it's evidence. I don't agree that it's powerful and I don't have the high degree of confidence he does. Also I definitely don't agree that it's conclusive evidence.
First, let me quote another piece of his post where I completely agree and then say why I think this monopsony issue is fundamentally different. He writes:
If an academic tells you that his research finds that the price of Acme Corp. stock-a stock traded, say, on the NYSE-is too low, what would be the first question you ask this scholar? The first question I would ask him is "How much of that stock are you buying?" If the scholar tells me "none," or looks at me befuddled as he explains that he's an academic and not an investor, I would dismiss his research on this front. That person, as I see him here, offers proof as good as it gets that he does not believe what he asserts.
Why do I agree here? Because all it takes, if one thinks a stock is undervalued, is a simple buy transaction that many of those same academics can undertake.
But hiring workers is different. Let's say you think that workers are undervalued by employers. Even if you're right, there are a lot of other skills involved in being an employer. And you have to get most of these right to make a go of it. Moreover, you might like being an academic and you don't want to switch your whole career because you see an undervalued resource.
Am I saying that Don is wrong in thinking that there's not much monopsony in the economy? No, I think he's probably right. What I'm saying is his particular argument here is not even close to a slam dunk.
Let me tell a true story about where I thought I saw a big profit opportunity in the early 1980s. I was working as a senior economist at the Council of Economic Advisers and President Reagan had "persuaded" the Japanese government to impose "voluntary" export restraints on cars shipped to the United States. After the VER took effect, there appeared to be $1,500 to $2,000 premium per car on cars exported by Japan to the United States. But since it was not an import restriction, my thought was to get some people with deep pockets together and buy a whole bunch of cars to be shipped to Guam and then divert the shipment to the United States. This arbitrage could make us rich. I approached a wealthy White House lawyer and suggested that we both quit our jobs and do that. He had what was to me, and still is, a slam-dunk argument against:
Listen, David, let's say you have a good idea. Let's say we explore the legalities and we learn that what you're suggesting is totally legal. You don't know the business. You know one thing: this apparent loophole you've found. But you don't know about financing cars, financing transportation, selling cars in the United States, etc.