The monopsony argument in favor of a minimum wage crumbles upon closer scrutiny.

Last week, The New York Times published an opinion article by Peter Coy titled “A Minimum Wage Can Create Jobs.”

In the piece, Mr. Coy acknowledges that “it’s true at some level” that “a government-mandated wage floor would reduce employment.”

However, he goes on to argue that, in practice, the minimum wage does not actually kill jobs — and, in fact, can create them — because of an economic phenomenon known as “monopsony.” He writes, “In contrast to a monopoly, in which there’s only one seller in a marketplace, in a monopsony there’s only one buyer — in this case, only one buyer of labor, as might be the case in a small town in the woods where everyone works for the local lumber mill.”

Image Credit: Flickr-Fibonacci Blue | CC BY 2.0

Under monopsony conditions, firms can get away with paying workers lower than their market rate because there is no competition — just as monopoly firms can get away with charging higher-than-market-rate prices.

Therefore, if we institute a minimum wage, he argues, the issue of underpaying workers goes away without hurting employment. He writes:

The monopsonist is unhappy [when the minimum wage is raised] because it has to pay people more. But here’s the twist: It no longer has an incentive to suppress employment, because the amount it pays per worker will be fixed at the minimum wage, no matter how many people it hires. Because of the wage floor, its labor cost curve is flat — just as in a competitive market. If the minimum wage is chosen well, the employer will keep on hiring right up to the point where workers are fully paid for the value they create.

This is an increasingly common argument made by minimum wage advocates. But how reflective of reality is it? And what are some of the unintended consequences of implementing a minimum wage on this basis?

Let’s examine.

An Out Of Touch Analysis

If a monopsony is properly defined as a market condition where there is only a single buyer of labor such that workers literally have one option for place of employment, then it is virtually non-existent in the US. This is doubly true in low-skilled occupations — in other words, the jobs that are impacted by the minimum wage and thus relevant in Mr. Coy’s analysis — because workers have the ability to switch between companies that do radically different things without having to be formally trained in school.

In any given cluster of towns, there may be a Walmart, a Dunkin Donuts, two gas stations, a few retail stores, a movie theater, an Amazon fulfillment center, along with a number of small, local businesses. Additionally, there may be opportunities to drive for Uber, Doordash, or a local pizza shop. For there to be this many, and often more, firms like this within a reasonable driving distance is not rare at all. When it comes to the average low-skilled worker, all of these businesses are competing for his labor. This competition means that any given firm cannot necessarily radically underpay its workers because those workers actually have other options.

This makes sense intuitively, but it is also found to be the case when one examines the evidence. In today’s America, the two most obvious examples of companies that can be accused of being monopsonists in certain areas are Amazon and Walmart — the former of which has over a million employees in the US, and the latter of which has 1.6 million. If they were monopsonists, one would expect these firms to be paying their workers as little as possible because they do not need to compete with any other firms. But in 2018 Amazon gave over 500,000 employees a pay raise to $15 — making it a self-imposed minimum — without government intervention. And in March of 2021, Walmart increased its average pay for US hourly workers to $15.25 per hour.

A paper from economists at the University of California, Berkeley and Brandeis University found that “controlling for unrelated trends in wages at the occupation and commuting zone level,” Amazon’s voluntary pay increase led to “an increase in average hourly wages... of 4.7%” among similar employees in the same area and market.” As The New York Times put it, “When Amazon raises its minimum wage, local companies follow suit.”

There are two crucial things to note here. First, the fact companies in the same area and market raised their wages after Amazon did points to the fact they are competing for workers. Second, neither Amazon nor Walmart would have any interest in raising their wages at all if they were competing with no one else; after all, they would be able to pay their workers whatever wage they chose. But the realities of competition made it so the only way to attract labor was by increasing wages.

This has become even more apparent on the back end of the COVID-19 pandemic. There are currently over 10 million unfilled jobs and many employers are providing bonuses and other incentives in order to lure and retain workers rather than lose them to their competitors. This certainly does not look like widespread monopsony, where workers are hamstrung into lower wages through lack of competition.

A Broad Solution for a Narrow “Problem”

Even if we were to accept Mr. Coy’s misleading premises about monopsonies in America, it still would not justify a broad implementation of an increased minimum wage. In his piece, he cites a study which found that only about 17 percent of employees work in labor markets that can be designated as “highly concentrated.” Yet, when people advocate for minimum wage increases, they are nearly always referencing a federal minimum wage increase.

This would mean that despite only 17 percent of employees possibly being underpaid due to their work being in an uncompetitive labor market — a claim that, as addressed above, is likely not the case — a supposed solution would impact 100 percent of workers and businesses. This would be a sweeping solution for a pretty narrow “problem.”

Moreover, different states have vastly different costs of living. Therefore, implementing a one-size-fits-all “solution” would be disastrous, as it does not take the complexity and diversity of America into account. This can lead to some pretty bizarre outcomes. For example, FEE reported in January that “A $15/hour minimum wage in Puerto Rico is like a $68/hour minimum wage in DC. Half of all states would have an effective minimum wage more than $20/hour. Mississippi’s would be more than $30/hour.” It is important to point out that even if it was true that monopsonies truly dominated the market, a minimum wage could still be set so high that it causes unemployment. That would certainly be the case in numerous states.

Government Created Market Concentration: An Unintended Consequence

This proposed “solution,” an increased minimum wage, is also likely to have adverse consequences in the long run that actually lead to more market concentration — meaning more companies that approach monopolist and monopsonist status.

The reason why was explained perfectly by Ron Paul in a USA Today op-ed. He wrote:

Monopolies and cartels are creations of government, not markets. For example, the reason the media is dominated by a few large companies is that no one can operate a television or radio station unless they obtain federal approval and pay federal licensing fees. Similarly, anyone wishing to operate a cable company must not only comply with federal regulations, they must sign a "franchise" agreement with their local government. (...) Government taxes and regulations are effective means of limiting competition in an industry. Large companies can afford the costs of complying with government regulations, costs which cripple their smaller competitors. Big business can also afford to hire lobbyists to ensure that new laws and regulations favor big business.

In other words, large corporations favor government interventions that make it harder to enter or grow in a market because it hurts their smaller competitors — either putting them out of business over time or just inhibiting their ability to grow — in a way that doesn’t hurt them. That is the reason Amazon has used its time and money to lobby for a $15 federal minimum wage, for example. It is also the reason Walmart advocated for a higher minimum wage in 2005. These companies were not doing advocacy out of the goodness of their hearts; rather, they did it because it was a shrewd business decision.

Market concentration is the problem, according to Mr. Coy. Yet, ironically, further market concentration is also the result of the policies he advocates. These types of unintended consequences are inevitable when government intervenes. Maybe it’s time to trust the market.