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Opinion | A Minimum Wage Can Create Jobs

Opinion | A Minimum Wage Can Create Jobs

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A monopsonist maximizes its profits by paying workers less than the value they create. What’s less obvious, but crucial, is that it also employs fewer people than would be employed in a fully competitive labor market.

In a competitive labor market, companies pay whatever the going wage is, no matter how many people they hire. It’s different for a monopsonist. If it wants to hire more people, it has to pay them more. That gets expensive quickly, so it restricts employment.

Now imagine the government imposes a minimum wage. The monopsonist is unhappy because it has to pay people more. But here’s the twist: It no longer has an incentive to suppress employment, because the amount it pays per worker will be fixed at the minimum wage, no matter how many people it hires. Because of the wage floor, its labor cost curve is flat — just as in a competitive market.

If the minimum wage is chosen well, the employer will keep on hiring right up to the point where workers are fully paid for the value they create. So higher wages, more jobs. You can find a clever explanation of this at Khan Academy, with diagrams.

This is standard microeconomics, not some heterodox concoction. The question is how common the situation is. Few of us live in company towns. But while outright monopsony is rare, economists have found that many employers have some ability to suppress wages below their competitive level. A 2019 study of the U.S. by Ioana Marinescu of the University of Pennsylvania and three other authors concluded that 60 percent of U.S. labor markets accounting for 20 percent of workers are “highly concentrated.”

I recently interviewed Arindrajit Dube of the University of Massachusetts at Amherst, a leader of the new thinking about the economics of the minimum wage. He said there are three sources of employers’ wage-setting powers. One is concentration of jobs at one employer or just a handful of employers, as in the company town example. The second is “search friction” — the difficulty of switching jobs, which lets your current employer get away with paying you a little below market. The third is job differentiation: You might stick with a job because it suits you best, even if your employer is paying you below the market rate.

Dube — who himself earned the state minimum wage flipping burgers in Seattle at age 16 — says monopsony isn’t the whole story. The decline of unionization has given employers more power to set wages as they see fit, he says. And societal norms of fairness in pay “have broken down,” he argues.

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