David R. Henderson  

Christina Romer on Monopsony in U.S. Labor Markets

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One argument for a minimum wage is that there sometimes isn't enough competition among employers. In our nation's history, there have been company towns where one employer truly dominated the local economy. As a result, that employer could affect the going wage for the entire area. In such a situation, a minimum wage can not only make workers better off but can also lead to more efficient levels of production and employment.

But I suspect that few people, including economists, find this argument compelling today. Company towns are largely a thing of the past in this country; even Wal-Mart Stores, the nation's largest employer, faces substantial competition for workers in most places. And many employers paying the minimum wage are small businesses that clearly face strong competition for workers.


This is from Christina Romer, "The Business of the Minimum Wage," New York Times, March 2, 2013.

Christy, if you recall, was the first chair of the Council of Economic Advisers under Obama. She thought much more clearly on this than the current chair, Jason Furman.

The whole piece is actually quite good.

Here's the paragraph directly above the two I quoted:

First, what's the argument for having a minimum wage at all? Many of my students assume that government protection is the only thing ensuring decent wages for most American workers. But basic economics shows that competition between employers for workers can be very effective at preventing businesses from misbehaving. If every other store in town is paying workers $9 an hour, one offering $8 will find it hard to hire anyone -- perhaps not when unemployment is high, but certainly in normal times. Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers' bottom lines.

HT to the excellent Cyril Morong.


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COMMENTS (8 to date)
Alexandre Padilla writes:

This is indeed a good opinion piece and I use it often in my class. When I give tv interviews on the topic, I cite that piece and mention the part about a more generous Earned Income Tax credit would be better at helping the poor than increasing minimum wage.

Jim writes:

Just a quick note.

You quoted the first paragraph twice. I think you meant to quote the paragraph starting "First, what’s the argument for having a minimum wage at all?" as your last quote block.

Don Boudreaux writes:

Bob Higgs recently drew my attention to Price Fishback's 1992 book, Soft Coal, Hard Choicess - which, I gather, casts doubt even on the belief that workers in company towns were victims of monopsony power.

I've not yet read Price's book, but I did order it a few days ago and look forward to reading it.

I have read this excellent 1997 paper by Price (that Frank Stephenson informed me about some years ago). Here's a relevant slice from that paper:

How did “unfettered” labor markets operate in America at the turn of the century? An extensive amount of scholarship by economic historians shows that they functioned well enough that workers typically had multiple opportunities and were able to move to take advantage of them to improve their situation. This ability to exit in addition to active use of collective action in some settings served as a check against employer exploitation of their workers. Institutions like the company town, company unions, and share tenancy contained features that helped resolve problems with transaction costs.
David R. Henderson writes:

@Jim,
Oops. Thanks. Change made.

JK Brown writes:

The ironic thing about company towns is that they generally wouldn't have formed if it weren't for the company. The towns generally sprung up as a consequence of workers moving into the remote area to work for the company, which was most often involved in some natural resource extraction operation that controlled the selection of location. Advent of personal, fast, transportation reduced the need for the company to also establish a store to sell food and domestic supplies to the workers.


A couple weeks ago, I listened to the James Bessen interview on Econtalk where he explains the stagnant wages in the early 19th century mills even as productivity rise was dramatic was while the mills hired unskilled and trained them with a 5 or 6 fold increase in productivity due to that training, the machines were generally company specific so those skills weren't transferrable to another employer who usually wanted to hire someone fresh rather than retrain someone skilled at another type of machine. The wages started rising when standardization across the industry machinery occurred and skills were transferable.

Of course, it can go the other way as I hear COBOL programmers can do quite well as their numbers dwindle. Should we set wage caps on them?

Brandon Berg writes:

The idea that the minimum wage is the only thing keeping employers from driving wages down to pennies per hour is easily refuted by the observation that most workers make at least double the minimum wage.

I find the monopsony argument for the minimum wage puzzling. Employers of highly specialized labor arguably have some monopsony power (but workers also have some monopoly power, so it's more of a bilateral oligopoly), but minimum-wage workers rarely have much in the way of specialized skills, so they will typically have many roughly equivalent options for employment. This won't necessarily be the case when unemployment is high, but high unemployment is a sign of wages being above the market-clearing wage. The monopsony explanation is only plausible when there's nothing to explain.

Something I rarely see mentioned is that the fact that workers typically get paid full pay during a low-productivity training period at a new job gives workers some leverage over their employers. A worker can switch jobs without losing any income, but an employer loses money when replacing an employee.

Khodge writes:

"Robust competition is a powerful force helping to ensure that workers are paid what they contribute to the bottom line."

Having just endured one of the minimum wage amendment barrage of ads, what the worker is worth to the employer is never mentioned, probably because it is too toxic.

On one hand you hear "now I can take care of my kids" or "a higher minimum wage will be good for all businesses."

On the other you hear "I am barely covering my expenses now."

Not a word about the value of the service provided by employees.

john hare writes:
Having just endured one of the minimum wage amendment barrage of ads, what the worker is worth to the employer is never mentioned, probably because it is too toxic.

Is that because some employees have no, or even negative value? It is fairly easy to see that if employers could make money off of every single employee, and they were all greedy businessmen, that there would be no involuntary employment in the country.

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