Working Paper 2016-02: Lester

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Inside-monopsony

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Authors:

T. William Lester, University of North Carolina at Chapel Hill


Abstract:

While efforts to increase the minimum wage have stalled at the Federal level, dozens of cities have passed or are considering local increases that will bring the minimum wage up to $15 per hour. The pace and scale of recent wage increases—spurred on by an organizing drive by fast food workers in the “Fight for $15” movement—leave policy makers and analysts wondering about their eventual impacts. While the impact of publicly mandated labor standards on employment is well studied and remains highly controversial, there are still important missing pieces in our understanding of how locally-enacted labor laws impact the labor market. Although previous research shows that moderate increases in the minimum wage do not result in net job losses and reduces labor turnover in the aggregate, there is still uncertainty as to how higher labor standards may reshape employment practices within firms. Recent studies show support for a model of the labor market that is monopsonistic rather than perfectly competitive using county-level data aggregated for low-wage industries (e.g. restaurants) or groups of workers (e.g. teens). This paper directly examines employer responses to higher labor standards through a qualitative case comparison of the full service restaurant industry across two fundamentally different institutional settings. Research was conducted in San Francisco—where employers face the nation’s highest minimum wage, no tip credits, a pay-or-play health care mandate, and paid sick leave requirements—and in North Carolina’s Research Triangle region—where there are no locally enacted labor standards. Consistent with the monopsonistic model, evidence shows that higher labor standards led to wage compression in San Francisco even while some employers continued to offer greater benefits to reduce turnover. Employers in San Francisco exhibit greater investment in finding better matches and tend to seek higher-skilled, more professional workers, rather than invest in formal in-house training. Finally, higher wage mandates in San Francisco have exacerbated the wage gap between front-of-house and back-of-house occupations—which correlate strongly with existing racial and ethnic divisions. Initial evidence shows that some employers have responded by radically restructuring industry compensation practices by adding service charges and in some cases eliminating tipping.