Monopsony in labor markets is seems to be becoming a hotter topic year after year. I can’t help but cynically think that some of its popularity is due to the fact that it can be used as a rationale for policies that are widely popular with the public, but less so with economists, like minimum wages, worker safety legislation, unemployment insurance, and legal protection for unions. However, the reasons why monopsonies are a problem for economists don’t seem to be the reason why more politicized commentators oppose them.
A quick review on the economics: a monopsony is a lesser-known cousin of the monopoly, so lesser known that any economist discussing monopsony with noneconomists will hiss the “s” in monopsssssssssssssssony to emphasize the difference. The difference here is that, in a monopsony market, there is only one buyer of the good in question, which, in this case, is labor. The existence of a single employer means that the number of people who that specific employer can hire increases with the wage that he/she offers, which looks like this graphically:
Since the single employer can’t price discriminate (pay workers in the same position different wages), the employer maximizes their profits by paying workers Pm, a wage below their marginal productivity Pc. This reduction in wages transfers some of the worker’s producer surplus to the employer, pictured in green. However, as a nasty side effect, there are some workers who would be willing to work for the employer at a wage lower than their productivity, but who are unwilling to work for the employer at the lower wage Pm. This creates a deadweight loss, pictured in black. This subset of employees are worse off because they don’t get jobs, and the employer is worse off because he/she cannot profit from these workers. A minimum wage, therefore, could increase employment in this monopsonistic labor market by forcing the employer to pay wages high enough to get these marginal workers out of bed, creating net societal gains. Sure, the minimum wage would also give the green surplus back to workers who were already willing to work at a lower wage, but, from a economic standpoint, it’s the increased employment of those marginal workers that really matter.
The puzzle then, is why those who advocate for a minimum wage on monopsony grounds seem to focus almost entirely on the transfer effects of monopsony rather than the deadweight loss. The pattern is for minimum wage advocates to write describing the monopsony model, with optional jabs at economists who the “ECON 101” method of modeling the labor market, and conclude that a minimum wage would be efficiency enhancing, while simultaineously waxing about how workers need better pay now, completely ignoring the efficiency-enhancing properties of the minimum wage that they just spent so much time proving. Almost no where will you read an advocate for minimum wages write something like:
Around the nation, there are thousands of potentially hard-working employees who could be a real asset to our nation’s employers, but are unfortunately unwilling to go out and work for $7.25. Employers would love to hire them at higher wages, but market structure prevents them from doing so without hurting their business. A higher minimum wage is the push these workers need play a productive role in America’s labor market.
If you take the monopsony model seriously, this is the primary and intended benefit of minimum wages, while any change in the income distribution is just a side effect.