Where Is The Monopsony Power? Adam Ozimek On Minimum Wage Laws

Click here to read this article from Forbes.

"You hear it claimed relatively often today that low wage employers have monopsony power. For example, this is a sometimes cited explanation for the claim that there is no disemployment effect of the minimum wage. A monopsony is when an employer has market power in the labor market, sort of the employer equivalent of a monopoly. The argument is that a monopsonist is able to hold wage below the equilibrium level, just like a monopolist would hold prices below the competitive equilibrium. Economic theory suggests that in response to a price floor that increases prices slightly, a monopsonist might not decrease labor demand. However, a recent study provides empirical evidence that seems somewhat at odds with this: large retailers pay more than small retailers.

You can find more about the study here, I’ll quote myself summarizing the results:

The researchers found some starting facts. For instance, after controlling for individual and store characteristics, firms with at least 1,000 employees pay 9% to 11% more than those employing 10 or fewer. Looking at individual establishments rather than firms, large stores pay 19% to 28% more than small ones. This is consistent with research in non-retail industries that finds, all else equal, big firms tend to pay more. In addition, they find that retail managers make more per hour than non-managers in manufacturing, and that there are more managers in retail than in manufacturing.

So this raises something of a puzzle to me. If monopsony power is an important feature of the labor market, and monopsony power should be prevalent when firms are bigger and therefore have a larger share of the local industry, then why do big firms pay more than small firms? The small mom and pops should be closest to operating in a competitive labor market and have little bargaining power, but they pay less. Maybe the productivity effects of big retailer outweigh the monopsony effect, but that just is another way of saying it’s not as an important feature of the market. In addition, ask yourself whether you predicted this result of big firms paying more before you read about this study. Be honest, if someone asked you to predict the results, would you have told a story about big firms bargaining workers down to lower wages? If so, it is time to re-evaluate your views."