Must-Read: Sandra Black, Jason Furman, Laura Giuliano and Wilson Powell: Minimum Wage Increases and Earnings in Low-Wage Jobs

Must-Read: Back when Card and Krueger first suggested that there was substantial effective monopsony power in the low-wage labor market and thus that there would be no disemployment effect from (modest) increases in the minimum wage to make it binding, I said: “Clever, but nahhh.” The reason for their findings, I thought, was that labor demand is just inelastic in the short and perhaps the medium run–but maybe not in the long run.

I confess that I think I have to change my mind. Economists do not fail to find disemployment effects from (modest) increases in the minimum wage that make it binding because labor demand is inelastic and statistical power is insufficient. Employers actually do have substantial monopsony power in the low-wage labor market–even though they shouldn’t. And the minimum wage is best thought of as an anti-monopsony rate-regulation policy that raises low-wage employment, raises average low-wage earnings, and brings the market closer to its competitive equilibrium:

Sandra Black, Jason Furman, Laura Giuliano and Wilson Powell: Minimum Wage Increases and Earnings in Low-Wage Jobs: “18 states plus the District of Columbia have implemented minimum wage increases…

…joining ten other states that have raised their minimum wages at least once since… 2009…. A comparison with states with no minimum wage increase since 2009 suggests that the recent legislation contributed to substantial wage increases with no discernible impact on employment levels or hours worked…. Employment in the leisure and hospitality industry follows virtually identical trends in states that did and did not raise their minimum wage. Moreover, employment in this low-wage industry grew somewhat more quickly than employment in the private sector overall. This finding is consistent with a well-established empirical literature in which minimum wage increases are often found to have no discernible impact on employment (Card and Krueger 2016, Belman and Wolfson 2014)….

Economists and policymakers are increasingly recognising that employers often have some degree of monopsony power in labour markets. And a recent CEA report discusses some reasons to think that such wage-setting power may be on the rise–including a long-run decline in labour mobility and a similar decline labour’s share of national income. To the extent this is true, it makes the case for a higher Federal minimum wage all the more compelling. Raising the wages and incomes of working Americans is one of the country’s greatest policy challenges, and it has been a central goal of many of the Obama Administration’s initiatives and proposals…