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I am seeing more help wanted signs in restaurant windows and most do seem willing to hire more for serving rushes, not full time, though this does vary over the cycle. Openings are usually higher than hires overall.

Lord: Yep, the "Help Wanted" signs seem to me to be a sign of hungriness to buy (though I'm not really sure whether they mean what they seem to mean). My local Tim Hortons usually seems to have that sign in the window.

I think this very much depends what the alternative is for labour. If the alternative is no income, then labour would be hungry to sell at any price above zero. Of course, in advanced economies, the alternative is unlikely to be zero in most cases. So let's assume that the minimum wage is above unemployment benefit level. Whether or not labour is hungry to sell at that price depends on whether the price difference between unemployment benefit and minimum wage is sufficient to compensate them for loss of leisure. If there is a sanctions regime which deprives the unemployed of their benefits if they turn down minimum wage work, then the effective cost of leisure is much higher and we can assume that labour might be more willing to sell at minimum wage - though it depends how long the sanction lasts. If minimum wages are topped up with EITC, the effective differential between unemployment benefit and minimum wage is increased, presumably raising the likelihood of labour choosing to sell at minimum wage.

This is what happens in the UK, and it is in my view why the UK's employment performance in recent years has been unexpectedly strong and its wage growth unexpectedly weak. There is evidence of clustering of jobs at the minimum wage: it would be easy to assume that this means that the minimum wage is too high, but in fact it appears more like a herding effect - the "minimum wage" has become the "going rate" in many industries. Steep tapers on EITC contribute to this by reducing the incentive to seek higher pay. So despite having a record proportion of the population in work, which should mean a tight labour market, we actually have labour hungry to sell at the minimum wage, but not hungry to sell at higher wages - which is characteristic of a slack labour market in which people will accept low wages rather than risk losing their jobs. Weird.

I suppose my point is that public policy influences the degree to which buyers of labour have monopsony power.

The impediment to hiring a worker that a firm will lose money on is clear. The firm that does that will go out of business.

But what is the impediment to a firm not hiring a worker that it will make money on? What forces a firm to make that decision? If you had undifferentiated goods, you could say that some other firm will go and hire that worker instead. With Monopoly, absolutely nothing forces the firm to expand hiring. No other firm will go in and hire that worker instead. The worker will remain unhired.

So you don't need monopsony. Monopoly is enough to affect both supply and demand. You just need firms that don't take perfect advantage of every market opportunity in front of them. After all, they are lazy monopolies and are not subject to competition, so what form of market discipline will force them to take advantage of every opportunity for expansion?

I am now going to a coffee shop where the owner earns obscene profits, but has yet to open a franchise coffee shop somewhere else. Why? Because they don't feel the need to do it. He has enough money already. He pays minimum wage because that's all that the law requires, and he is able to find enough workers paying the minimum.

The terms you are using (monopoly and monopsony) may apply in ways that you are not really considering here. Several other applications come to mind.

1. The buyer of minimum wage labor may be the state, not the apparent buyer who actually pays the wage. The apparent buyer (who pays minimum wage) is not paying a wage determined by the buyer exclusively (meaning uniquely). Instead, he is paying a wage determined by the state (an entity with police power) to be the minimum standard acceptable. In turn, the state collects taxes on that labor payment (in the form of social security taxes, unemployment tax, and industrial insurance tax). This allows us to point to the state as the monopsony buyer of labor who sets a standard of employment. This standard screens the buyers of minimum wage labor to leave only those buyers who have jobs available earning an output rate greater than minimum wage plus employment taxes.

2. Each laborer has monopoly power over his labor. He can work for minimum wage or not. We can safely assume that a higher minimum wage would increase the amount of labor available (but it would come with the additional screening of employers and additional taxes paid to the state already discussed).

3. Employers (such as restaurants) can be considered as monopolies within their own walls. This designation automatically recognizes the customer as accepting a managed price but I think it unwise to extend this into a smoothly sloping demand curve for the restaurant sector. Instead, the demand curve would be discontinuous as customers refused to accept one managed price situation and moved to another (similar but different) situation. A restaurant monopoly is a rather strange combination of blended conditions with some restaurants finding a winning combination and others forever failing to be equally successful.

Welcome back to blog-land. Thanks for more food-for-thought.

Frances: I think it's important to distinguish between alternatives to selling labour *to a particular buyer of labour* vs alternatives to selling labour at all. Like when it comes to monopoly power: the alternatives to not buying food are dire, but this is compatible with individual farmers having zero monopoly power.

rsj: "The impediment to hiring a worker that a firm will lose money on is clear. The firm that does that will go out of business."

I think it's important to distinguish between marginal and average here. Both a monopolist firm and a monopsonist firm will pay a wage that is less than the value of the marginal product of labour. But (with fixed costs, and economies of scale) the marginal product of labour will be greater than the average product of labour, so profits could be positive, negative, or zero.

Roger: thanks!

We all have "monopoly" power over the good we sell, in the sense that I alone can sell apples grown by me. But if my apples are seen by buyers as being no different from apples grown by others, I can still face a perfectly elastic demand curve for my apples, and have no "monopoly power" in that sense. And that second sense is the sense that matters, for looking at the effects of price or wage controls.

In any labor market computation it's most conceptually accurate I think to see both ownership and labor as cooperative sellers and the consumer as the buyer. Very obvious when there is a strong union (e.g., Teamsters). Both sellers want to squeeze as much as possible out of the consumer without putting both out of business -- so they work something out.

Less obvious when labor has no bargaining power at all -- other than where they fit on the scale of gradually more valuable skills from the ladder of must-take-whatever-is-offered or starve employees.

Denis: I tend to look at macro a bit like that too. My simplest conceptual framework is to imagine Larry Ball's economy of yeoman farmers, each of whom produces one good, which he prices and sells to all the other yeoman farmers.

But I'm not sure if that is the best way to look at that small subset of the labour market that is most directly affected by the minimum wage?

Sure, and I would argue that there very many workers that firms lose money on employed at firms. We can start with CEOs, for example, or pretty much anyone in the C-suite. But if a firm *keeps* on hiring workers that it loses money on, it will go out of business. But if a firm refuses to hire workers that it will make money on, it will not go out of business. It will just be a smaller firm than it could have been. That fundamental asymmetry is pretty damn important in terms of the biases that surviving firms have.

rsj: "But if a firm refuses to hire workers that it will make money on, it will not go out of business. It will just be a smaller firm than it could have been."

For a monopolistically competitive firm (for example), with a downward-sloping ATC curve (at least locally), that will not be true. It will be too small to cover its fixed costs.

Seriously, Nick, are you being obtuse on purpose here?

rsj: No. Are you being obnoxious on purpose?

Clearly Nick Rowe and rsj are thinking of different types of monopolistic firms.

Nick has a textbook type of monopolistic competition market in mind, where each firm faces a downward-sloping demand curve, but there are enough firms that none of them earn (excess) profits in long-run eqilibrium.

rsj seems to be thinking of firms that have some monopoly power, so that they can earn (excess) profits that are not competed away by near-by entrants; even though they may be "small" compared to large corporations. The monopoly power could come, for example, from the owner having having some relatively rare skill. In rsj's original example, the owner's scarce factor was the ability to run a particularly good coffee shop. In other cases it could be it could be scarce know-how or patented technology.

One often hears of people wanting but not getting more hours in hourly wage jobs. It's true of me and my consulting work. :)

A pretty meaty post when I have to be at work in ninety minutes.

My employer has a two-tier wage structure. Without getting too far into the weeds, the top tier is pretty nice, but reserved for people hired before a long time ago; with an impractical migration mechanism from the lower tier, which is at minimum wage . . . ish. (Regular but small increases are randomly set against spasmodic increases in the provincial minimum wage, and there is probably something worth studying in the variation in long-range retention depending on the premium on minimum wage when an individual was hired.)

Practically, the problem with the bottom tier (and the migration mechanism) is that we have severe, recurrent difficulties hiring the full complement of minimum wage employees. This fits the monopsonistic model. As for the nature of the supply constraint, whatever else can be said for it, internally, one of our most serious problems is that we have an excess of student applicants, as we have great difficulty scheduling students. It also might be noted that food prep experience is a significant lever. If you have that, we will hire you, at least at our store.

It seems plausible that at the time the two-tier structure was negotiated, the long term intention was to eliminate the top tier. Our union fought for mechanisms that would preserve the jobs of existing employees, but since migration rarely happens, it has been depleted over time. Whatever the intention, the failure to recruit at the lower tier has meant a slow decline in our labour force. This has been met over time by expedients such as understaffing (which will be familiar to anyone who has patronised our stores, especially at off-hours) and reduced operating hours.

However, and insofar as I understand the dispute, this goes to rsj's disagreement with Nick; the most successful expedient for dealing with our declining labour force has been store closings. In some cases, these have been short-term closings for remodelling. In others, the company may be in a position to profit from sale of land. In others, there is a strong business case, or the building is redeveloped by its owners. There is, however, a residual. That is, if current trends and intentions continue, we will be at a point soon where we will have to close stores solely to maintain the labour force at existing ones.

Although it is difficult to frame an operating principle and impose it on my management's actions (there aren't enough smart people for rocket science, never mind grocery, seems to be my employer's hiring philosophy, not without some justification), it would seem that it embraces the monopsonistic model. It starts with the assumption that labour raiding will be unsuccessful, which is why it doesn't try. Although even that is unfair, since we do raid, and raid hard, for junior management, with dismal results.

RE: rsj's disagreement with Nick, rsj writes "So you don't need monopsony."

Now, if we take the definition of "monopsony" from Google, rsj could have written "So you don't need a market situation in which there is only one buyer.".

Perhaps rsj is thinking that when discussing the minimum wage, we never have a monopsony condition that can be assigned to any particular employer. Instead, each employer makes his own (perfectly logical) decision about the value of hiring any employee at any particular wage.

Nick would agree that each firm is a monopoly within it's own walls but but may face competition on the sales side of the macro-economic interaction.

It seems to me that rsj's disagreement can be captured with the question "Are we being logically consistent when we accuse an employing sector (such as the restaurant sector) as being monopsonistic when hiring low skill employees?". Or the same question other words, "How can a whole sector (entirely composed of competitive monopolies) exhibit monopsonistic hiring practices towards low skill employees?"

These questions may not have been what rsj had in mind. The answers may go more to philosophy than economics.

I'm not sure what the more recent literature finds, but the classic Card and Krueger paper argues that their results are not consistent with the monopsony explanation. They note that if this explanation were driving the results then they should see prices fall in response to an increase in the minimum wage, and they don't see that. They then use stores which offer recruitment bonuses as a proxy for being "hungry" for workers and look to see if these stores increased employment in response to the minimum wage increase more than other stores, and they don't see that either.

The monopolist is not “always hungry to sell more”. Price above marginal cost is optimal, required for a monopolist, and does not signal that more sales would make for optimal profits. The central characteristic of monopoly power is the awareness than selling more will force price and marginal revenue down.

Under real-world uncertainty if demand is larger than expected, it seems the operating procedure of monopoly is almost always to stay committed to the price, and let demand determine quantity. But when demand is larger than expected then a mistake has been made, profit could have been higher. The monopolist is not “happy” to make the extra sales at the erroneous price.

There may be wisdom and experience behind the traditional procedure in making the calculation which is meant to determine both price and quantity, then posting and committing to the price. Perhpas even politics at work here. We are angry at the guy who sets up a bidding war for the last tickets available to a World Series game. We accept a $200 posted price to see the musical Hamilton.

An interesting phenomenon is that in input markets the monopsonist does not usually let price determine quantity, they usually determine both price and quantity. If an electric utility bids for coal, it bids both a price and a specific quantity. If a restaurant wants labor, it specifies the wage and hours, not just the wage and not just the hours. But to the extent input requirements vary because realized demand varies, the restaurant with a bit of monopolistic and monopsonistic power keeps the wage fixed, sending scheduled workers home early, or calling for more kitchen help if the restaurant is too busy. So the restaurant tries to act like the electric utility, but somehow life is more complicated for them.

The key point is that the monopsonist is not “always hungry to purchase more”. They are very aware that if they purchase more then the cost will be higher, they will force the price up. They do NOT want to purchase more!

Your description mixes up planned optimization under certainty with operating procedures and temporary realizations under uncertainty. And your language pretends that we know what “excess supply” or “excess demand” mean under monopoly and monopsony. Under imperfect competition the relevant signals are the whole demand or supply schedules facing the actor with market power. In monopoly there can be pricing regrets, pricing mistakes, but not excess supply or demand, there is no supply curve to be balanced with a demand curve. Likewise for monopsony, no demand curve to be balanced with supply. Excess demand and supply are concepts which apply only to perfect competition. And you characterize firms as being “happy” when they make optimization errors.

I think Clinton Greene has nailed it. Monopolies and monopsonies are about aggregate properties, not individuals. You can only talk about the temperature of an individual particle in an abstract sense. Otherwise you are just describing its velocity. Supply and demand curves are emergent statistical entities. Don't get confused.

Almar: I think that's close, but not exactly.

Take the textbook case of monopolistic competition. In long run equilibrium, profits are zero. If one individual firm produces either slightly less or slightly more than the profit-maximising quantity, its profits will be negative, and it will go out of business. And in the textbook case of monopoly, where the firm can earn positive profits even in the long run, it could produce either slightly less or slightly more than the profit-maximising quantity and still stay in business. It looks symmetric to me.

Erik: "Practically, the problem with the bottom tier (and the migration mechanism) is that we have severe, recurrent difficulties hiring the full complement of minimum wage employees. This fits the monopsonistic model."

Yep. That's the sort of example I had in mind.

Chris: thanks for good comment.

"They note that if this explanation were driving the results then they should see prices fall in response to an increase in the minimum wage, and they don't see that."

Interesting. Seems theoretically correct to me.

"They then use stores which offer recruitment bonuses as a proxy for being "hungry" for workers and look to see if these stores increased employment in response to the minimum wage increase more than other stores, and they don't see that either."

I have my doubts about that one. If firms pay some sort of non-wage recruiting bonus to attract workers, then when the minimum wage is increased they could presumably cut that bonus in response, so the net effect would be small or zero?

Clinton: I see what you are saying (I think), but I'm not sure I agree. If I set my price, and then see my downward-sloping demand curve unexpectedly shift right, yes I may regret that I did not set a higher price (though not if elasticity stays the same and MC curve is flat), but it is still a happy surprise (even if it is just a temporary shift). And the more elastic is my demand curve, and so the smaller the markup of Price over Marginal Cost, the smaller the amount I will be happy to be surprised like that. In the limit, as we approach perfect competition, I don't care about increasing output when there's a surprise rightward shift in demand (and if my MC curve slopes up I won't increase output).

Tomorrow, I might comment at 5am or at 8, depending on whether we've moved shifts around to give J.J an extra shift. He's not getting any hours at his other job, and he has a distressing dependence on food. We find he works more efficiently when he's not dead.

Look, guys, it's pretty simple. (Actually, it's not, and I'm going to do a codicil in bold at the bottom.) The unemployment rate in the United States and Canada is falling; this is expected to cause wage inflation. A little known American institution called the Federal Reserve is raising something called "the interest rate" to pre-empt this. Economics-talking guys say that this could be good, could be bad, depending on whether this inflation actually happens. Right now, it's not. (Remember this point. Otherwise, you might "get confused.") Anyway, wouldn't it be neat if we had a bunch of academics who studied this stuff? They could work out whether inflation will happen in advance. That sure would help the Federal Reserve!

Again, I don't know from economics-talking theory, but this is how it has been explained to me by many libertarian science fiction authors: When there is a free market in something (say, labour), the price matches supply to demand. Obviously, J.J. demands more work. His wage should go down! On the other hand, he already has two jobs. And in three weeks, when the new schedule is up, we'll give him all the work he wants. (The problem is that he's starving now.) Should he have had a third job? A fourth? A fifth? He had a second job in the first place because it made his schedule work better, and as insurance against exactly this kind of thing. The more jobs he has, the less likely he is going to be able to work any job. There's only 168 hours in a week to block out on your schedule!

I can tell you how it used to work, which was that we paid enough that J.J. would be able to get through the tough times when there wasn't. That's not the case any more. The minimum wage, which we pay, is just not enough money.

I hope that this anecdata supports a more generalised case: the price of labour is not "clearing" the supply. It follows that there is not a free market in labour. And, yet, it appears that there are; many would-be employees, all bidding for available work and time. (Let's set aside the notion that both work and hours are in the hands of the employer.) Given that it is not a free market, we can reasonably ask whether we are dealing with something that we can call a "monopoly" or a "monopsony." I perhaps shouldn't comment further, because I'm not sure how we get to a monopsony of labour-sellers, either.

Monopoly is another matter. The obvious conclusion, drawn by many others hitherto, is that employers, supposedly independent actors, in fact coordinate their actions. The appearance of a free market on the labour-buying side is, in fact, an illusion. Not to pile on the sarcasm, this will be recognised as Vulgar Marxism 101. Are we really in a situation that can only be addressed by a proletarian revolution? Because that would have externalities! It also seems . . .dumb. (In more senses of the word than one. There's lots of dumb employers.) Honestly. "Class consciousness" is a mechanism that needs explaining.

The more complicated answer is that we have employers hungry to buy more labour; and would-be employees hungry to sell more labour; but the supply is not responsive to price. Something else is intervening to make the story more complicated. My own sense, based on a great deal of empirical experience, is that it is student loans, but I have no idea how they might be fitted into the subtleties of one of Nick's thought experiments.

Obviously this post is tl;dr and no-one read it. So, bolding, and all caps. I'd pull the handy fire alarm, but Nick's too busy with his car to install one down here. Anyway, CANADA IS RUNNING OUT OF LABOUR. FAST. THERE WILL BE NO-ONE TO DO THE THINGS YOU NEED TO GET DONE, AND THIS WILL HAPPEN FAR SOONER THAN YOU EXPECT. SOMETHING HAS TO BE DONE NOW NOW NOW NOW NOW.

Clinton: a followup point. One interesting little model is where the firm sets both price and output before observing the realisation of demand. Imagine a restaurant that posts menu and cooks meals before the number of customers is known, and real-world restaurants are a little like that, in that they set the number of tables and staff etc in advance. Some days they have unsold meals, and other days they have customers they can't feed. The lower their demand elasticity (the greater their monopoly power), the greater the probability they will have unsold meals (assuming they set price and quantity to maximise expected profits given uncertain demand).

I did a post on a little model like that once

@Erik Lund:

> Obviously, J.J. demands more work. His wage should go down! On the other hand, he already has two jobs. And in three weeks, when the new schedule is up, we'll give him all the work he wants. (The problem is that he's starving now.)

I think one odd piece of the puzzle is that on the individual level, labour can be a weird kind of Giffen Good – willingness to work increases as the wage level decreases, simply because the marginal utility of not starving is high. One econometric observation of this was for the "daily income target" behaviour of New York City cab drivers.

If this holds true in aggregate and if this holds true near the minimum wage level (net of benefits such as EITC), then it has weird implications for minimum wage changes.

The logic of monopsony is that if you offer offer higher pay to attract new workers, you must also raise the pay of all of your existing workers. The marginal cost of adding labor is greater than the wage.

Of course, that isn't necessarily true. You might well be able to wage discriminate. We call it wage compression around here.

Now, true wage discrimination would look more like wage inversion. The new people are paid more than the senior workers.

My impression from the real world is that firms generally increase the pay of their worker based on time at the firm.

So, it isn't like the new worker gets just what all the existing workers are getting. The more usual situation is that the new people get paid less.

In this situation, there isn't really wage inversion, where the new person is paid more. IF the firm needs to raise wages to attract workers, it pays the new people more, but they don't have to raise everyone's pay to keep the differential the same. It is true compression. Instead of someone who is at the firm for a year making 50 cents an hour more than the starting pay, the tight labor markets results in higher starting pay without necessarily increasing everyone else's pay in proportion. For example,the senior workers only make 30 cents an hour more.

Anyway, that destroys the logic of monopsony.

The monoposony argument assumes that all the labor is uniform and is paid the same price.

You are the monopoly purchaser of wheat and all comers get the same price. If you try paying some farmers more, then the other farmers will sell to the farmer getting the better price for resale to you.

Tough to do that with labor.

Anyway, I just don't think monopsony is needed to explain upwardly sticky wages. Wages don't immediately rise to clear labor markets when there is a shortage. If there is a shortage, and a modest increase in the minimum wage occurs, then quantity supplied increases and so does employment, and quantity demanded decreases clearing the market. The higher wages would have happened eventually, but the increase in minimum wage fixed it faster.

With lots of different labor markets and equilibrium wages, however, it is likely that a minimum wage hike will also push some markets into surplus. And if it is a really big increase, that is more likely to be a problem.

Bill: I think that's right. I had forgotten about price (wage in this case) discrimination. But to do perfect wage discrimination, the buyer would need to know each individual worker's reservation wage, and pay accordingly. And knowing this, individual workers would have no incentive to reveal that information. All would want to pretend to be the marginal worker at that firm, and it would be hard for the firm to figure out which of them was the marginal worker, ex ante.

For years in the 90's-00's salaries for QC colleges (wages? is salary the name for professionnal white collars wage slaves emoluments?) were stagnating and recruitment very difficult. So admin asked for the current staffs to teach extra courses. At subsequent negotiations, Treasury Board argued that profs didn't have a heavy enough schedule and should either get extra load or lower pay (since they could teach extra courses) and didn't need increases as they taught extra...
Does that fit in?

Nice post. Thanks

Jacques Rene: The 'recruitment being very difficult' is what fits in. That suggests monopsony.

Thanks Mike!

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