Should-Read: Simon Wren-Lewis: Mainly Macro: Minimum Wages, Monopsony and Towns

Should-Read: There really should not be this much monopsony in the labor market. And yet it moves: Simon Wren-Lewis: mainly macro: Minimum Wages, Monopsony and Towns: “Empirical work clearly shows plenty of examples where imposing or increasing minimum wages did not reduce employment…

…Few would argue that result will hold in all situations for all levels of the minimum wage. That is why, before George Osborne raised it, the UK minimum wage level was set by the Low Pay Commission, who tried to assess these issues…. There are two main reasons why Econ 101 (first year undergraduate) economics gives the wrong answer on minimum wages: search and monopsony. Take search first… a zone around the Econ 101 wage within which variations in wages would not lead to job losses or people leaving. Where the actual wage is within that zone will depend on bargaining power between the worker and firm. Monopsony is the situation where alternative employment opportunities for workers are scarce…. I suspect many labour economists regard monopsony in the labour market as something of a special case. That perception may need updating, argues Marshall Steinbaum…

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Brad DeLong
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