California's Destructive Minimum Wage
And no, monopsony is not a good argument for the minimum wage.
Economists have a name for this empirical regularity: the law of demand. But, just to drive it home, I should state it: all else equal, at a lower price more will be demanded and at a higher price, less is demanded. The law of demand applies to virtually everything: the demand for steaks, the demand for cars, the demand for houses, and, yes, the demand for labor. That means that when governments raise the price of relatively unskilled labor by substantially raising the minimum wage, the number of unskilled workers employed will fall. There is one exception: when employers are monopsonists (a term I’ll explain later), a skillfully set increase in the minimum wage can actually increase the number of jobs. But this exception is limited and, as I shall explain later, would occur, if ever, only in regional markets.
This is one of the opening paragraphs of my latest article for the Hoover Institution, “High Minimum Wages Hurt Many Workers,” Defining Ideas, April 25, 2024.
And:
One of the leading proponents of the idea of monopsony in the labor market is British economist Alan Manning of the London School of Economics. He and I debated the minimum wage in an event sponsored by a group of MBA students at Northwestern University. In that debate, Manning claimed that even a large increase in the US minimum wage would cause little or no job loss.
He gave this example to make his case. See if you can spot his implicit, and implausible, assumption. An employer has an employee who produces something worth $12 an hour to the employer. The employer currently pays the employee $8 an hour. So, if the government raises the minimum wage to $10 an hour, the employer will continue to hire the worker. That’s true.
But did you catch his implicit assumption, which is almost certainly false?
Read the whole thing.
Granted, I have not worked in fast food since the early 1990s, and the last time I worked at a restaurant at all was in the late 1990s, but I have a hard time understanding the argument that the low-skill workers in restaurants are participating in a monopsonistic labor market. Workers moved from restaurant to restaurant all the time! Is there some evidence that this is no longer the case? I even used outside offers to negotiate a wage increase (an interesting story I should tell you some time).
I suppose there may be only a few restaurant employers in a small town, but in any medium-to-large city there should be plenty of scope for low-skill workers to move between jobs. Are the advocates of the monopsony model focused on small towns?