Sunday, January 15, 2017

Powerful Empirical Evidence Against the Monopsony-Power Justification for Minimum Wages

By Don Boudreaux.
"From a report in today’s Washington Post on an effort by the government of Montgomery County, Maryland, to make it illegal for anyone who cannot produce at least $15 per hour for an employer in that county to be employed profitably in that county raise that county’s minimum wage to $15 per hour:
One of [County Executive Ike] Leggett’s principal objections to the Elrich bill [to raise the minimum wage] is the time allotted for phasing in the rise to $15. Leggett has said he wants an extension from 2020 to 2022 to minimize disruption or hardship for businesses.
Note: if the only theoretically sensible economic justification for minimum wages held here in reality – namely, that employers in Montgomery County, MD, possess monopsony power in the market for low-skilled labor – there would be no need to raise the minimum wage gradually rather than instantly and immediately.  If the geniuses who rule Montgomery County have accurately determined that monopsony power over low-skilled labor exists in that (very wealthy) county, and that a minimum wage of $15 per hour is indeed the wage that results in ‘correct’ outcomes that mimic those of a competitive labor market, then there is no reason not to raise the minimum wage to $15 immediately.  Under these monopsony conditions, there would be no economically relevant “disruption or hardship for businesses.”  Sure, businesses would suffer reduced profits, but those profits are excessive (by the assumption of those who rely upon the monopsony-power allegation to justify minimum wages); the hike in the minimum wage would simply transfer these excess profits from the monopsonist employers to low-skilled workers, the latter of whom would experience both higher wages and more job prospects as the result of the minimum-wage hike.

Looked at differently, the very fact that some of Montgomery County’s rulers are worried about economy-damaging business ‘disruption’ if the minimum wage is raised immediately and in a single leap to $15 per hour, is strong evidence that minimum wages are not intended to correct for the alleged ‘market failure’ of monopsony power.  And this evidence, in turn, suggests that the minimum-wage increases in Montgomery County, no matter how gradually imposed, will indeed reduce employment option for low-skilled workers."

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