An Empirical Conclusion
29th October 2013
Don Boudreaux, a Real Economist, lays out some inconvenient truth.
Specifically, Mr. the Aaron objects to my claim that, because there are no government-enforced prohibitions on the hiring of low-skilled workers, anyone who truly believes that monopsony power in this labor market exists should start a company that uses low-skilled workers. Mr. the Aaron calls my claim “not practical” and “comical.” But I stand by my claim. The researcher who found genuine monopsony power would, by starting his or her own company, earn profits and directly improve the economic lot of low-skilled workers. The reason, again, is that the exercise of monopsony power by existing employers keeps the prevailing wage lower than the value of what workers produce, at the margin, for their employers.
In short, monopsony power in labor markets keep workers underpaid. With all those underpaid workers out there – and because there are no government-enforced prohibitions on starting companies that employ low-skilled workers – a true believer that monopsony power is a prevalent reality can profit by exploiting this pool of underpaid workers. Yet they do not. They remain in their faculty offices writing papers and issuing commentary. I continue to insist that this inaction is sufficient evidence against the proposition that monopsony power prevails in the market for low-skilled workers – and, hence, conclusive evidence that the higher the minimum wage, the worse are the job prospects of low-skilled workers.
If an academic tells you that his research finds that the price of Acme Corp. stock – a stock traded, say, on the NYSE – is too low, what would be the first question you ask this scholar? The first question I would ask him is “How much of that stock are you buying?” If the scholar tells me “none,” or looks at me befuddled as he explains that he’s an academic and not an investor, I would dismiss his research on this front. That person, as I see him here, offers proof as good as it gets that he does not believe what he asserts.