Monopsony case
- See Chapter 7, pp. 202-207
- Monopsony: only one employer for a given type of labour.
i.e. no competing employers.
- this is the traditional definition.
- is it possible to have “monopsony power” and not be the only employer?
- some newer models argue yes (see discussion below).
Single-Wage Monopsony
- Single-wage: employer pays all labour of the same type the same wage.
- “Single-wage” outcome: assumes that the employer cannot "price
discriminate" i.e., pay units of L different wages.)
- labour demand model: also a single-wage model.
- labour demand models: competition helps produce this result.
- is a “single-wage” less appropriate in monopsony?
- Monopsony: only one employer of a type of labour (traditional definition)
- The employer is not a wage-taker: hiring decisions affect the
wage that must be paid.
i.e. employer faces the market supply curve for that type of labour.
- Cost of an extra unit of labour = marginal cost of labour = MCL
- For monopsony:
MCL >W
Why? - The employer must raise the wage to hire one more unit of L.
- So MCL is:
- the wage paid, PLUS
- the increase in wages paid to all other units of labour
MCL = W + L x DW/DdL > W
where: DW/DdL is the rise in W needed to attract more L.
- Hiring decision with monopsony?
- Hire more L as long as the benefit (MRP) exceeds cost of more L
(MCL).
- L will be at the level where:
MRP = MCL
- Wage? - Height of LS at value of L where MRP=MCL.
- Note that: W< MRP
- The worker is paid less than the value of their
contribution to output (MRP) : exploitation!
- Wage will be less than in a competitive labour market.
- Note role of absence of competing employers:
no competitor to bid the wage up to MRP.
- There is an efficiency loss (area A + B in diagram):
MRP > Height of Ls curve
(value extra (value of workers time)
output)
i.e. extra L generates a net gain: (MRP-W) for each extra
worker employed up to where MRP=Ls
- Importance of traditional monopsony: When might it arise?
- One-company town
- Market for workers with specialized skills: employer specific.
(see later discussion of “firm specific human capital”)
- Colluding employers or employer organizations
- can act as a monopsony
- uncommon in North America
- pro-sports: is sometimes an exception (teams agree not to
compete for players).
- can employers act like a “class”?
- could give Marxist results: exploitation.
- Historical importance of traditional monopsony?
- Worker mobility plays a role in ensuring many possible employers.
- Past: if workers less mobile more monopsony power.
- Practices like serfdom: tie worker to the land.
- eliminate mobility, gives landowner market power.
- Is monopsony more important in countries today where mobility is
limited? (rural China?)
- A broader view of the importance of monopsony?
- the basic monopsony model requires that individual employers face an
upward sloping labour supply curve.
- Newer views on monopsony suggest reasons other than a single employer
for upward sloping labour supply curves.
- mobility costs
- gives a firm some market power over existing employees.
- differences in job characteristics and worker preferences:
- low wage: attract only those who like non-
monetary aspects of the jobs the most.
- to expand: pay higher wages to attract those who
do not care for the job characteristics.
- generally labour market frictions:
- labour market: function of matching workers and employers.
- search process by both employers and workers.
- costs of search can give rise to upward sloping firm labour supply
curves and monopsony power.
- P. Diamond's story:
- say everyone is paying the "going wage" (need to be
competitive with other employers)
- one employer reasons that can reduce the wage slightly and
still retain workers since it is costly for workers to move.
- other employers think the same way: all wages falling by a
similar amount.
- but now the "going wage" is lower than before: cut again!
- cuts continue: move toward the classic monopsony result even
though there are many competing employers.
- Some newer evidence possibly consistent with monopsony models:
- large firms pay more than small firms ceteris paribus.
- employee quit rates fall as wages rise: implies upward sloping Ls
- recruiting is easier if wages are higher
- reasonable in job search models of the employer-employee matching
process.
- also suggests an upward sloped firm labour supply curve.
- Kahn (2000) “The Sports Business as a Labor Market Laboratory” Journal
of Economic Perspectives. (handout)
- Professional Baseball:
- Cycles of competition and monopsony: “reserve clause” tied
players to their original team.
- Wage movements: high when competition was most intense;
low when monopsony ruled.
Wage Discrimination and Monoposony:
- Generally: monopsonist can do better if it can wage-discriminate.
i.e. pay similar workers different wages.
- many employees would still be willing to work for less than the monopsony
wage (those on lowest segment of LS).
- employer makes more profits if s/he can pay these workers less.
- ability to pay different wages may also expand employment:
- MCL of an additional worker lower than one-wage case:
don’t have to raise everyone’s wage if discriminating.
i.e. less reason to restrict hiring to hold down wages.
- Ideal situation for employer: “perfect wage discrimination” (see diagram)
- pay height of labour supply curve for each unit of labour.
i.e. least workers would accept for each unit.
- all the surplus from the market goes to employer (area C + D below).
- very hard to do!
(maybe individual wage bargains where employer is an expert bargainer)
- Intermediate cases:
- Different wages for different groups: reflect differences in their labour
supply curves (minimum they will
required to work).
- generally: lower and more inelastic LS – lower the group’s wage.
- can this explain differences in wages by sex or race?
i.e. are these differences rooted in shapes of Labour Supply
curves?
- Different wages for different labour supply from same workers:
- a schedule of wages: different say for first 10 hours, second 10
hours etc.
- a possible explanation of overtime pay?
- Practical problem with wage discrimination in monopsony?
- to profitably wage discriminate employer must be able to identify those
willing to work at low wages.
- workers: no incentive to reveal this information.
- employers need some way of uncovering this information.
Applications of Labour Demand: Minimum Wage
Evaluation of government policies.
- Many government policies affect labour costs:
- Employment Standards: minimum wages, overtime, vacation pay
- Payroll taxes: raise labour costs
- Wage subsidies: decrease labour costs
- The effects of these policies on wages and employment levels will depend upon the
elasticity of labour demand.
Minimum Wage
- See: Benjamin, Gunderson and Riddell, Ch. 7 (pp. 208-218)
Gunderson (2007) Minimum Wage: Issues and Options for Ontario
(for Ontario Ministry of Finance, see course site)
- looks at a $10 minimum wage for Ontario.
Goldberg and Green (1999) “Raising the Minimum” (website: pro-
minimum wage).
- Provincial minimum wage laws the most important.
- Federal minimum wage: federal jurisdiction industries.
- Structure: - general rate
- Special rates: - younger workers: formerly quite common
- domestic workers (several provinces).
- Some exemptions:
- Professionals, some trainees, some farm and domestic workers.
- Commonly stated objectives of Minimum Wage laws:
- Anti-poverty tool: provide a living wage.
- Protection against exploitation.
MINIMUM WAGE RATES FOR EXPERIENCED ADULT WORKERS
Jurisdiction Hourly Rate Effective Date
Alberta $9.95 September, 2013
British Columbia $10.25 May 2012
Manitoba $10.45 October 1, 2013
New Brunswick $10.00 April 1, 2012
Newfoundland $10.00 July 1, 2010
Northwest Territories $10.00 April, 2011
Nova Scotia $10.30 July, 2013 (indexed to CPI)
Nunavut $11.00 January, 2011
Ontario $10.25 March 31, 2010
Prince Edward Island $10.00 April, 2012
Quebec $10.15 May 1, 2013
Saskatchewan $10.00 Dec. 1, 2012
Yukon Territory $10.54 April 1, 2013 (indexed to CPI)
- Special rates: - tip rates
- minimum piece rates
- some weekly rates
- youth rates, inexperienced workers
- Do Canadian minimum wage rates matter?
- wage distribution frequencies: spikes at minimum wage? (assignment)
Effects of a Minimum Wage in a Competitive Labour Market:
- Is the market for minimum wage workers competitive?
- Many employers in main minimum wage industries: fast food, retail, services
- Consider a market with LS = LD at a wage below the minimum wage.
- At the minimum wage:
- Wage is higher than with no minimum wage.
- Quantity of labour hired is lower than with no minimum wage
(L0 to Lm)
- The size of the fall in the amount of labour hired depends
solely upon the elasticity of labour demand.
Evaluating the policy?
- Efficiency (deadweight) loss.
- Amount employers will pay > Amount workers need to
paid for L0 to Lm.
- The surplus generated by these matches is lost.
- social loss as a result.
- As an anti-poverty tool?
- Some low-wage workers benefit (those who keep their jobs)
- Some low-wage workers lose (those who do not get work)
- If wage elasticity of labour demand is inelastic (greater than -1 e.g., -.5) a
rise in the minimum raises total wage income of low-wage workers).
- Targeting problems
- Are all low-wage workers poor?
e.g., teenagers living with their parents.
- Are all minimum wage employers well off? small retailers?
- Is it an effective way to make transfers to the poor?
- Done on the basis of work hours.
- Size of transfer not geared to family need.
- Attraction of minimum wages to governments : no government
expenditure.
- if elasticity of labour demand is small adverse employment effects small.
- A view of some economists: imperfect but better than nothing.
Some Alternative Anti-Poverty policies:
- Training and education:
- Labour demand theory suggests that people have low wages
because they have low productivity (MRP).
- Education/training may move the poor into higher paying jobs.
- Side-effect? raises the market wage of those left in
low-skill jobs.
- Training and education can be targeted.
- Problems with training?
- Which skills to train for?
- problem of occupational forecasting.
- It may be impossible to raise productivity of some people.
- Paying for training: must be funded with taxes that create their own
efficiency losses.
- Empirical studies on the effects of government training programs on
earnings and employment:
- typically effects appear to be small (see text pp. 289-291).
- Warburton and Warburton: note some successes.
- Targetted income support:
- Provide income support to the poor directly (see discussion of social
assistance)
Advantages:
- Avoids problem of transfers to people who are not poor as
may occur with minimum wages.
- Can gear payments to family need.
- Avoids the problem of job loss.
Problems:
- Labour supply incentive problems (see section on social assistance)
- Direct budgetary expense: taxes have their own efficiency losses.
- Wage subsidies for the low-skilled or disadvantaged:
Advantages:
- Has the potential to raise wage rates but not reduce the
number of jobs .
- paid to the employer: raises labour demand.
- Can be targeted.
Disadvantages:
- Efficiency (deadweight) loss:
- some jobs created are not worthwhile without the subsidy.
- some jobs would have been created anyway.
- Must be paid for!
- With low demand elasticities: large subsidies needed to have
much effect.
- Targeted subsidies:
- stigma issue: does a subsidy signal problems?
- displacement: substitution of subsidized for unsubsidized.
- Efficiency- Equity tradeoff:
- Each policy aims to better position of the poor.
- Each policy is likely to create some efficiency loss.
(the competitive market outcome is efficient, each policy changes this
outcome and creates an inefficiency).
- Key Questions:
- Which policy creates the smallest efficiency loss for a given
decrease in poverty?
- Do the equity gains from reduced poverty outweigh the efficiency
losses?
Challenges to the traditional view of minimum wages:
- A series of studies in the early-1990s failed to find the expected
negative employment effects of minimum wages.
D. Card and A. Krueger Myth and Measurement
(see: handout from the Card and Krueger; summary p. 217 of text)
- Interesting method: “natural experiment” technique.
- Effects of a policy change measured by comparing the change in
outcome of the affected group to the change in outcome over the
same period of a control group.
e.g., say E is the outcome variable (employment)
(Eafter – Ebefore) affected - (Eafter – Ebefore) control
- this is the “difference-in-differences” estimator.
- Appropriateness of the control group an important issue.
- Method has been used to look at other policy applications.
- The results from the Card and Krueger studies are controversial:
- counter studies suggest small negative effects on employment.
i.e. old standard estimated effect.
e.g. David Neumark’s work challenges these results.
- Is there any theoretical reason to expect Card and Krueger’s result?
Monopsony and Minimum Wage:
- It is possible for a minimum wage to raise the level of employment!
- How? (see text Fig. 7-9 for example)
- With monopsony a minimum wage may lower the marginal cost of labour
even though it raises total labour costs.
i.e., raising employment by one will raise wage costs by M since,
by law, the employer must pay the worker a wage of M.
(no rise in wage for already employed workers is needed since they
already get M)
- A minimum wage will still be employment reducing with monopsony if the
minimum wage is set “too high” (above MRP0 in diagram).
- Usual objection to monopsony case:
- Retail, accomodation and food services are the
most important minimum wage industries.
- Many employers: likely competitive.
- Card and Krueger suggest that new models of monopsony
power may be relevant.
- see arguments on importance of monopsony above.
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