Facts & Other Stubborn Things

I’ve attended to all the points in his comment section before, although he does not directly talk with those. Rather than bury responses in another one of Cafe Hayek’s comment sections, I thought I’d provide them here. I’d encourage people not to take Don’s term for what my claims have been – he says I’ve made a great deal of claims which I actually haven’t. So, if you don’t read me claim something please confirm with me that I actually think it before attributing it to me! The issue at hand is whether market entry can dissipate the monopoly power that is often cited as grounds why we don’t see big disemployment effects from the minimal wage.

Don has repeatedly asserted that people who don’t think there are major disemployment results should go out and hire a lot of underpaid workers. They might enrich themselves and help low-income employees. If they’re not willing to get this done, Don actually suggests that is evidence in and of itself against the empirical work!

There are some obvious issues with this problem, and Don seems to presume that entrepreneurship is a simple affair (he telephone calls it “easy”). I disagree, but let’s leave those issues aside. The question is, would the mere entries have even any effect on the type of frictions that we think cause monopsony power?

I don’t believe so. If that was all it had taken, we wouldn’t see much proof monopsony power. A lot of the has centered on the relationship with the employer, but workers in general – and low-wage workers specifically – often face search frictions that donate to their employer’s monopsony power.

Search is costly and it’s particularly costly if you’re a low-wage employee. These employees face liquidity constraints, many are young and accommodating family members, and transport limitations will probably raise the costs of search. All this reduces separation rates and plays a part in an incumbent employer’s monopsony power. Don is delivering a very naive/classic understanding of market power where it’s solely a amounts game.

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Market power is caused by sparse markets under this view, so admittance should solve the problem. I don’t think this cuts it. For a long period – really going back to Edward Chamberlin at least – economists have grasped that companies, products, workers, capital, etc. are not undifferentiated or homogenous entities. Product differentiation provides market power when there are many companies in the market even. The same goes with workers. The heterogeneity of labor leads to many of the asymmetric information problems I outlined above.

In these monopolistic and monopsonistic competition situations additional competition of course erodes market power, but it does not eliminate it. These are not simply abstract theories – workers and capital really are heterogeneous and differentiated. Whenever we do price theory, we can’t just ignore that and construct more convenient models that don’t acknowledge it. What might matter more for eroding monopsony power is entrepreneurship targeted at the resources of monopsony power.

Innovation and entrepreneurship in private accreditation or other options for revealing more info about employees’ efficiency or allowing you to connect employers to workers may help. But mere entry into a market that employs low-wage workers doesn’t have any obvious benefits unless we simply have charity at heart (which is not Don’s point). The ironic thing is we see types of what Don is demanding in the news headlines all the time.