A number of people wrote, blogged, or commented to point out that monopsony does not require collusion, only substantial search friction. This is very true. However, I saw no emails, posts, or comments that actually explained why it might be reasonable to believe that the minimum wage job market is particularly characterized by search friction. Retail and fast food are pretty much the least frictional job markets there are. You're talking about industries that have annual turnover rates well in excess of 100%--I've heard numbers in excess of 1000%. If there is substantial search friction, the workers sure seem to enjoy the rubbing. By comparison to this explanation, tacit collusion among hundreds of employers seems positively reasonable. But perhaps I am missing something.
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The issue is not search friction, but the relative monopoly a location gives the place.
Many workers at the minimum wage level have no means of transport (car, etc.) and so being able to go to a job close by where they live (or on the way to someone else's commute) confers a sizable advantage in non-monetary terms.
That relative monopoly of the employer to supplies of low cost labor with transportation is the issue.
Eh, that strikes me as wildly implausible. For starters, most minimum wage workers are not poor. Second, most poor people have cars. Third, fast food and retail cluster; if you can reach one, you can reach many.
If you are living on a rural subsistence farm in Idaho, this is a problem--but you don't even have access to one minimum wage job. If not, you are within striking distance of many fast food and retail outlets.
On behalf of the not-insignificant number of your readers who don't have a formal economic background, do you have a link to a definition of search friction?
Minimum wage workers at fast food are often not poor.
They are teenagers who do not have drivers licenses as it is pretty common for kids to delay getting their licenses until they are 18 or 19.
While they may legally get a license as young as 15, the reality of sky high insurance rates, etc. mean that most do not have a car until they are much older.
90%+ of fast food workers do not live in cities like MM does with regular, reliable, frequent, public transportation. So it is either walk, bike, or, bum a ride if they do not own a car.
Take this factoid from an unpaid chauffeur of teens --- they get to work with the help of their parents and anyone else around them they can bum a ride from.
Come to think of it, I am going to form a union and demand a minimum wage, benefits, and reimbursement of expenses....
Unpaid chauffeurs of the world, UNITE!
You have nothing to lose but your tank of gas!
It's pretty much what it sounds like: the various factors that hamper your job search, like the time it takes to interview, the difficulties in finding out who's hiring, and so forth.
D - I'm sure there are some people in the middle of nowhere who can only reach one minimum wage job, but your talking about a tiny minority of minimum wage workers. As Megan points out there is often a clustering of such jobs, and also many minimum wage workers own or have access to a car.
Do you really want to set national, or even state wide policy for all low wage workers based on the tiny minority in unusual situations?
What is a minimum wage worker?
Cause if its really just people who make 5.15/hour or the minimum... do they even still have those? I worked any number of menial jobs in high school and college and the last time I actually made the minimum wage was @ Cici's Pizza in 97. And this was in Joplin Missouri--- not exactly the highest paying city in the world.
So is it really minimum + a couple bucks an hour?
Just want to get clarification about whether we are talking about people who literally make minimum wage or if that is code for "people working crappy jobs for peanuts".
Tim,
I am afraid I am going to come out in favor of a minimum wage, but not for the ideological reasons.
There is a thriving market for people to work below minimum wage, except we call it things like:
- unpaid interns, including plenty of them in government, non-profits, etc. around DC
- people who work "on spec" like real estate brokers
- people starting new ventures
I do not believe that minimum wage laws will disrupt these markets.
What a minimum wage law will do is to set a floor for persons who are employed legally, and also implicitly, set a minimum level of productivity or ability to get up to the minimum standard quickly for any person so employed.
That is not a bad thing.
It is like setting minimum standards in housing, or minimum standards of fitness for an automobile.
Sure, you can cut up to 25 to 30% of the cost of a car out if you dropped FMVSS entirely. But should you?
BTW, I am greatly in favor of slashing FMVSS down from its present morass, but not for eliminating it.
A related discussion about this is the manufacturers have used government mandated standards / tests as a legal shield against liability.
In as much as I think lawyers need to be exiled to the Moon with a 2 day supply of Oxygen, that is a dangerous trend.
D, there's a difference between standards on the concealed safety attributes of housing and cars on one hand, and the wage attribute of a job on the other hand.
By setting a safety standard on automobiles, you are defining what it means to be a "car" and you are lifting from the buyer the need to hire a consulting engineer to evaluate the cars they want to buy. While there are free-market solutions to this problem -- Consumer Reports comes to mind and they presumably would hire consulting engineers and disassemble the cars they test if the standards were not in place -- it's reasonable to say that a person of normal intelligence cannot tell whether the car he faces on a dealer's lot is safe. It's reasonable to worry about whether a person can end up buying an unsafe car without knowing it and factoring it into hir buy/no buy decision.
When a person evaluates a job, they get told what the wages are. It's not reasonable to worry about whether a person can fall into a low-wage job without factoring that low wage into hir decision as to whether to take the job.
-dk
Dick,
"you are defining what it means to be a "car""
I am proposing exactly the same way of thinking --- defining what it means to be a "job" in a place.
That if it is going to be a legal "job" paid on an hourly basis, it will pay a minimum of "x".
Conversely, I am also defining that an "employee" of a legal job have to meet standards set by an employer.
It is not acceptable to hire a cripple and pay them 1/10 of the "minimum" - or make them pay for the privilege of working - regardless of whether that wage makes economic sense because their productivity is "y" and not worth the minimum wage.
I think the minimum wage is useful because I think you really should set a floor on what you can pay a person - a living wage floor - because otherwise, if someone CAN'T live on their wage, that ends up getting made up with government spending - food stamps and such - and so the low-wage employers simply pay a low wage because they are subsidized by the government.
Further, as it is, the minimum wage is way below what a real living wage would be, so it probably has little effect.
I hope this makes it through the spam filter:
http://en.wikipedia.org/wiki/Monopsony
Kind of wonky, but hopefully applicable to the discussion.
As a layman, it seemed like a plausible explanation of the concept. Hopefully an economist will confirm or deny this.
I posted this on the previous thread, but will repost it here:
What about the ratio of applications to available positions? I've seen lots of media stories about positions receiving hundreds or thousands of applicants. In that situation, wouldn't "monopsony effects" result in depressed wages? (And therefore justify minimum wage policies to prevent abuse and exploitation.) Maybe the issue isn't "search friction" but oversupply of labor?
I'm a bit out of my element here I admit, but some of this just seems intuitive.
To second Rod McFadden, Googling "define:search friction" returns no hits; nor is it on Wikipedia; nor do any of the results when searching for the string "search friction" provide definitions. Nor does the string,
"search friction" definition OR glossary
return anything meaningful. The publications the engine returns lack any definitions of their subject material (understandably, I guess).
What is search friction?
D,
The problem is that fast food suffers the least serach frictions of any industry. It's likely to be near residential areas relative to other businesses and is deliberately clustered with other low-wage retail, even in rural areas, since they target customers who are already on the go for other reasons. This is particularly true for gas stations - I can't think of any case off hand where I've seen one without the other within a block. The monosopy explaination simply doesn't work for fast food.
My pet hypothesis is that raising the minimum wage has a temporary pro-employment effect by slowing attrition through raising the opportunity cost of transitional unemployment, while employeers are still hiring people on at the same rate. The effect becomes significant for fast food since constant hiring tends to be necessary to maintain a sufficient workforce with such a high turnover rate. Lower turnover industries don't need to hire as agressively to maintain the same number of employees so it's not as noticeable when their estimates are off.
I see you answered my question a recent 11 posts ago, please disregard my previous submission.
If a person is priced out of a car because of safety, they can take the bus or bum rides until they can save enough for a safe enough car. If a person is priced out of a job because low wages offend middle class sensibility, their options are to live of the charity of others or to take a job off the books. Jobs are more important than cars and so to take jobs away from poor people is more damaging than taking away cars.
If the problem is an oversupply of labor, the laws of supply and demand explain low wages. Advocates of the monopsony theory are arguing the opposite, that raising prices by legislative fiat will cause demand to rise as well.
Being out of your element has never stopped anyone here.
D - Yes there are some ways for some people to work for less than minimum wage, but the interns, "on spec" workers, and people stating businesses aren't people at the bottom in terms of ability, education, and skill. The people at the bottom are the ones that can be priced out of the job market by a minimum wage, and they aren't likely to get an internship.
DBB - Re:
Most people making minimum wage are people with another source of income in their household. Either they have another job (which may be above minimum wage), or their spouse does, or they live with their parents. Should there be a legal requirement that a teenager make enough money working 40 hours a week to support himself, when he doesn't actually support himself? And when if your force the wage up he might lose his job?
As for government benefits, well to the extent you create unemployment with minimum wages, you might have to pay out even more.
Tim,
I acknowledge that some may be priced out, but I would say that is the cost of a minimum accepted standard for a "job" and an "employee".
FYI, if Federal Motor Vehicle Safety Standards are entirely dropped, together with emissions standards, you can produce a car for about $2,500.
But I highly doubt we would want too many of these 1 lakh cars on the road.
Employment effects of minimum wages aside, minimum wages also constitute a wealth transfer for firms that employ low wage workers. If society deems it necessary that people have a certain floor of compensation for work, then society should pay those costs, not the employers of low skill workers. This is why programs like the EITC are a lot more equitable and efficient (don't push people out of the labor market) than minimum wages.
Indeed, I think much of the lowness(?) of wages for entry-level jobs (still well above minimum wage, in my area) is actually due to the turnover; workers who work for a month or two then quit will never be very productive, and those who stay longer can usually get a bump into the $teens/hour pretty soon if they're reliable.
The problem for most of those people AFAIKT is that they can't hold down a job because of childcare, health, substance abuse, immigration status, legal problems, or just lack of motivation. Addressing that, if we can, will do a lot more than any doubtfully useful frobbing of the minimum wage.
"a certain floor of compensation for work"
That sentence summarize the problem with how work is conceived of in neo-classical and, for that matter, marxian economics.
Work is something that is not a good in and of itself, it is a negative that someone has to be "compensated" to do. Presumably because the person who is not working for wages have something better to do.
My fundamental objection to this view of work is that work is by no means a negative for an individual, but an intrinsic part of our "social being" in a society where most of us do not have activities like subsistence farming, etc. to keep us alive.
If you take the position that it is an intrinsic good to have people at work for a certain wage rather than to sit home and collect the identical sum doing nothing, then having as many as possible of the population at work is in fact, a collective good.
My argument is that to pay for idleness (Welfare, Unemployment "compensation", charitable handouts, etc.) fundamentally undermine the importance of work as a socializer, an activity that keeps people from doing things that are potentially harmful, deviant, or otherwise undesirable should they be not employed.
Look at most of continental Europe, where tight controls on hiring and firing, unionization, etc. have created an underclass of permanently unemployed, much like the underclass of mostly black ghetto dwellers in the US that is nearly permanently unemployable for different reasons.
To me, the danger of this underclass goes far beyond undermining the work ethic, incentives to work, etc. It goes to the heart of social stability in that persons who are idle at the margins of society and kept alive by handouts with no obligations are at high risk of doing things that upsets social order even more, like drug dealing, petty crimes, etc. because they are not occupied most of the time at a job.
So having said that, I am for a minimum wage, and at the same time, for the elimination of handouts without a reciprocal obligation to be at "work".
Count me in for eliminating programs like Social Security, disability payments, etc.
Presumably in most cases we're really talking about oligopsony (relatively few buyers of labor compared to sellers i.e. laborers) not monopsony (just one buyer/employer). While effective monoposonies exist (the classic example is a company town), I think Megan is right that's uncommon.
Any argument about monopsonies ought to carry through to oligopsonies in a weakened form, especially when you take into account tacit collusion / social pressures among employers.
D -
Re: "I acknowledge that some may be priced out, but I would say that is the cost of a minimum accepted standard for a "job" and an "employee"."
That seems to be circular reasoning. We should have a minimum wage, because we should have a minimum wage (a "minimum accepted standard" for wages that's legally enforced is a minimum wage)
Re: "FYI, if Federal Motor Vehicle Safety Standards are entirely dropped, together with emissions standards, you can produce a car for about $2,500."
Maybe. I doubt it. People want safe cars and to a lesser extent low emissions, so that cars with high emissions and poor safety would be at a disadvantage. Beyond that the safety and emissions standards do cost serious money, but not the majority of the cost of the car. Maybe the car would go from $25K to $18K, but not to $2500.
More importantly the two issues are separate. If we(the two of us), or some politicians, or society generally, decides that safety and emissions standards are a good thing, that says nothing about minimum wages. Esp. since bad safety design results in deaths, and lack of emission controls would result in greatly increased pollution. Lack of minimum wages would result in neither, and in any case my opposition is not so much to the current minimum wage (even though I am not a supporter) but to the idea of a "living wage", where you have to pay a dependent, or a person working a second job, enough to support himself, or even to support a family, even if the job is not his main means of support, and even if you might cause him to lose the job and thus needed income, while at the same time raising costs and thus putting downward pressure on people's standard of living.
Crust - I don't think most minimum wage employment situations can reasonably be considered oligopsonies.
Tim,
We should have a minimum wage (and the elimination of most get money for doing nothing schemes like social security, disability, etc.).
Included in this vision would be steep taxes on unearned (non-wage income) from passive activities like interest, dividends, etc. up until a person is at retirement age, which would be set at 30 years below their life expectancy at birth.
Similarly, collecting from more than 2 pension plans simultaneously will be banned, and in no case can a person begin to collect prior to retirement age.
Now, I am saying that there is a fundamental social good that comes from people coming to work, being active in the workforce for every year they are capable --- even if it means going to a make work job where they produce little of use --- think of the Keynesian way of burying old bank notes and creating work from people digging them up again and spending it.
A set minimum wage in this scheme is earned, but in order to earn it, you have to show up at an employer for a regular work week.
Needless to say, the employer of last resort will be government funded / government, who will provide something even for the most crippled.
But the point is you have to work to earn the minimum wage. In my vision, there would be no other social security / welfare schemes where you do not have to work.
Now, on the the other issue. The $2,500 price point has been successfully achieved by Tata motors, the soon to be owner of Jaguar and Land Rover. They have brought to market the 1 lakh car in India. It seats 4, and is perfectly acceptable basic transportation.
There is no factual basis to support your position that people will not buy a $2,500 basic car in the USA.
The fact is, people are buying scooters, motorcycles, mopeds, golf carts at this price point.
Let the market decide.
My response to Megan's post above is here:
http://thegspot.typepad.com/blog/2008/04/monopsony-in-mo.html
What I wrote in response to her earlier post is here:
http://thegspot.typepad.com/blog/2008/04/note-to-megan-m.html
D - Having a minimum wage isn't exactly letting the market decide, neither is banning collecting more than two pensions. What if someone worked for 20+ years for two different companies. Should he be limited to one pension while someone else gets a much larger pension for 40 years of service? A private pension is part of compensation for service.
The $2,500 price point has been successfully achieved by Tata motors
The Tata motors car, in addition to being assembled with cheaper labor, has many other differences other than looser emission controls and crash safety requirements. Its small and slow (624cc engine, compared to my car's 3498cc engine), and generally not up to the standards that Americans and residents in other wealthy countries are used to. Its not simply an issue of getting rid of emissions controls and safety requirements.
D,
I can't make heads nor tails of your understanding of work.
If people would rather be idle than work, then doesn't "compensation" make perfect sense as a term?
If people would rather work than be idle, then doesn't "unemployment compensation" makes perfect sense as a term and as a policy?
Will,
Maybe I will explain it to you this way....
We will have "freedom through work".
"generally not up to the standards that Americans and residents in other wealthy countries are used to."
You are really against giving buyers the freedom to choose, aren't you?
What is wrong with getting rid of the regulations that prevent Tata from selling the car here, and let the market choose?
You would let companies choose to pay whatever they wish for employees, but you wouldn't give the people the right to choose a car that fits their needs.
Included in this vision would be steep taxes on unearned (non-wage income) from passive activities like interest, dividends, etc. up until a person is at retirement age, which would be set at 30 years below their life expectancy at birth.
Yay! Me being an American male, I get to retire at 47!
D-
You are really against giving buyers the freedom to choose, aren't you?
Huh?
How does pointing out 1 - That many people in developed countries, aren't going to like this car much, and 2 - That the savings are not only or even mostly from eliminating crash protection and emission standards, equate with not wanting to give buyers a freedom to choose?
As for - "What is wrong with getting rid of the regulations that prevent Tata from selling the car here, and let the market choose?"
Please find when I said something was wrong.
"1 - That many people in developed countries, aren't going to like this car much, and 2 - That the savings are not only or even mostly from eliminating crash protection and emission standards, equate with not wanting to give buyers a freedom to choose?"
On what lawful basis do you have a mandate to speak for "many people in developed countries"?
Are you their elected rep? Their Union leader? Did "many people" lawfully acceded their right to choose to you? If none of these things apply, then you claim have no more standing than a believe that the "great majority" of people favor minimum wages set at XYZ level...
The fact is Tata cannot sell these cars here because manufacturers and governments have adopted a set of rules, regulations, and other barriers to make it very difficult for an inexpensive car to be imported and sold here.
These anti-competitive measures are no different from unions forcing up wages and setting working conditions.
I would not be surprised if the $2,500 car will find a market in the USA if they are permitted to be sold here.
But in order to show that, the regulations and other non-tariff barriers that keep them out have to go first.
Re: "On what lawful basis do you have a mandate to speak for "many people in developed countries"?"
Its called expressing an opinion. Last I checked you didn't need a license to do that.
The fact is Tata cannot sell these cars here because manufacturers and governments have adopted a set of rules, regulations, and other barriers to make it very difficult for an inexpensive car to be imported and sold here.
They can't sell their cars here for that reason, but even without the rules and regulations, I don't think such a car would be a massive success.
Perhaps a bigger better car, with higher quality standards and fit and finish, that would still undercut the rest of the market. Selling for maybe $8k compared to the average $28K here.
They could perhaps also sell a few of the $2500 cars (if they can keep the price that low, and if you didn't have all the regulations), but I certainly wouldn't want to drive one, and many other Americans would be leary, or a very tiny, slow, and unsafe car.
Just to be clear none of these statements amount to "they shouldn't be allowed to sell these cars in the US".
Without a car, how do children get to school?
They walk or ride bicycles.
Since some people are willing to commute by car for up to one hour each way in the search for cheaper housing, it is reasonable to have a worker walk or cycle to their workplace for 30 minutes each way. (Good cardio work-out.)
So on a bike a worker could reach his job within a 10-15 mile radius on a bike. Since 75% of Americans live in cities now, I suspect the poor would be within bike distance of some sort of job.
p.s. I rode my bike 30 minutes each way to work at Taco Bell when I was 16. It was no big deal. I'd rather ride my bike than take a bus.
"I don't think such a car would be a massive success."
OK, I am fine with your opinion. Now, let the product in and let other people express their views with their wallets.
While such a car (with a top speed of of 55mph) will not be a great idea on the Interstate, it is plenty for toting around a small community ferrying kids.
A much more expensive but not much bigger car is the Mercedes Smart Car, which sells real well.
My point is, you are fixated on the idea of an acceptable car.
I am fixated on the idea of an acceptable job and employee at an acceptable minimum pay and the elimination of nearly all money for doing nothing programs.
Once you start with that, ideas of free markets get bent out of shape pretty quickly.
Hence, Americans are stuck with cars that have progressively gotten heavier (like Americans), bloated with features of dubious use like front and side airbags that duplicate the function of seat belts, high powered, large displacement engines that gobble up gas, audio and video equipment, accessories, etc. that all need to be powered, and it is not a surprise that the average weight of a car (net) has risen to 4,142lbs (2006) from 3,220lbs in 1987 despite a massive increase in the use of lightweight materials.
I would be happy with a light weight car with super golf cart like performance if it was to be legal on the road.
I acknowledge that some may be priced out, but I would say that is the cost of a minimum accepted standard for a "job" and an "employee". Even if that means that some people will never have a job?
That's the real story of minimum wage work. Good experienced workers never have to worry about the minimum wage; they're worth far more to their employers than that. Minimum wage affects workers whose value to the employer is low or unproven:
1) teenagers and others without a work history that can be checked out
2) the severely handicapped
3) those whose criminal record, history of often being fired or of walking out on jobs after a few days, or appearance and visible attitude make it likely that they'll just cause trouble on the job.
Most of these people have other means of support than their job (e.g., the largest group is middle-class teenagers who have all their needs supplied by their parents but want some spending money). If they can get a first job and work out well in it - which is possible even for the worst of group 3, if and when they finally decide to get serious about honest employment - then they will be on their way to better-paying and more responsible jobs. However, the higher the initial wage, the more reluctant the employer will be to take a chance on an unproven worker. Set a "living wage" as the minimum wage, and the only people that ever get hired without a good work history are those with personal connections to the employer, making it more likely that they actually will be worth that much.
I agree with markm. Why? Because, as an employer, I recall when I stopped hiring minimum wage employees. It was a sad day but mandated by increases in the minimum wage. Up until that point, I had willingly hired select employees who I could not "sell" the services of to clients but who I believed had potential. I was willing to train them. It was my risk. It worked. And, they progressed up the ladder. But the increase in the minimum wage has priced me out of that activity. The only way I could afford now to do the same thing would be to increase fees to clients. You need to keep in mind that we use, as do others, a factor of 3.1 against wages to determine fee to clients. 20/hrx3.1=60 hour. And that was just for 40K. We can not add the higher priced min. wage people who are not producers of services we can sell to our line-up. Would put the rest of my crew out of work.