The economics behind the issues: More on the minimum wage

2013.02-Min-Wage

In a previous blog, we discussed why minimum wage laws in a competitive labor market result in unemployment among low-skilled Kentuckians.

But what if it’s true, as some have recently claimed in the wake of President Obama’s State of the Union Address, that the market for unskilled labor is in fact not competitive? What if the market for unskilled labor is in fact “monopsonistic.”

The economic concept of a monopsony is the flipside of that for a monopoly. Whereas a monopolistic market is one with few sellers and many buyers, a monopsonistic market exists when there are few buyers and many sellers.

In the case of unskilled labor markets, the claim is that there are too few buyers of unskilled labor (employers), but many sellers (teenagers and other low-skilled workers just entering the job market). This results in employers being able to enjoy a non-competitive advantage over their low-skilled employees. They are able to pay their employees less than their labor is actually worth since there is no bidding war among employers to ensure wages rise to competitive market levels (where marginal costs equal marginal revenue – for all you economic junkies out there).The problem with this argument is that there is no earthly reason to believe that a monopsony exists for unskilled labor. Drive down the streets of almost any town in Kentucky and you’re bound to run into at least three McDonalds, three gas stations, two Wal-Marts, one car wash, and countless other outlets that employ low-skilled laborers – as long as the price is right.

The idea that there is some sort of cartel among all these employers of low-skilled workers (the most non-specific factor of production in the commonwealth) is about as ridiculous as the idea that Wal-Mart supports the minimum wage law out of charity. (The real reason is because they know their smaller competitors can’t afford increased labor costs, but that’s a story for another day.)Driving labor costs above the revenue generated from that labor will result in unemployment, either through outright downsizing or through the substitution of capital machinery for previously cheap labor.

And that’s why Kentucky business-owners no longer employ elevator operators or gas station attendants: capital machinery replaced these low-skilled employees who were too expensive for employers to justify hiring – because of minimum wage laws.

Because there is no monopsony in Kentucky for unskilled labor, the minimum wage law cannot benefit the most vulnerable among us. Further, because the cost-of-living in Kentucky is one of the lowest in the nation, increasing the minimum wage will hurt Kentuckians that much more. The purchasing power of a dollar in Kentucky is already greater than that of a dollar in cities like New York or Chicago. Therefore, the real value of a wage of $7.25 is already higher in Kentucky than in New York.

To raise the legal level which you must be paid even higher in order to accept a job would be disastrous for the most vulnerable among us.