Post on 24-Feb-2016
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Monopsony
In 2001, oil rig roughnecks accused their employers of illegally fixing their wages in secret meetings occurring over the 10 preceding years (Walsh, 2001). In other words, the oil rig companies were being accused of being a monopsony, acting as a single buyer of roughneck labor.
Suppose the supply of roughnecks (RN) is: π€=2.5+0.25 βπΏ
Where w is their hourly wage and L is measured in thousands of roughnecks per hour.
0 10 20 30 40 50 60 70 80 90 100 110 120 130 1400.002.505.007.50
10.0012.5015.0017.5020.0022.5025.0027.5030.0032.5035.0037.5040.00
Wage($ per hour)
Labor (thousands per hour)
Supply
If we β from 30 to 50 thousand,
Suppose the supply of roughnecks is: π€=2.5+0.25 βπΏ
Where w is their hourly wage and L is measured in thousands of roughnecks per hour.
0 10 20 30 40 50 60 70 80 90 100 110 120 130 1400.002.505.007.50
10.0012.5015.0017.5020.0022.5025.0027.5030.0032.5035.0037.5040.00
Wage($ per hour)
Labor (thousands per hour)
Supply
If we β from 30 to 50 thousand, then TE on will β by $450 thousand. The MC of will, on average be
Suppose the supply of roughnecks is: π€=2.5+0.25 βπΏ
Where w is their hourly wage and L is measured in thousands of roughnecks per hour.
0 10 20 30 40 50 60 70 80 90 100 110 120 130 1400.002.505.007.50
10.0012.5015.0017.5020.0022.5025.0027.5030.0032.5035.0037.5040.00
Wage($ per hour)
Labor (thousands per hour)
Supply
If we β from 30 to 50 thousand, then TE on will β by $450 thousand. The MC of will, on average be
Suppose the supply of roughnecks is: π€=2.5+0.25 βπΏ
Where w is their hourly wage and L is measured in thousands of roughnecks per hour.
0 10 20 30 40 50 60 70 80 90 100 110 120 130 1400.002.505.007.50
10.0012.5015.0017.5020.0022.5025.0027.5030.0032.5035.0037.5040.00
Wage($ per hour)
Labor (thousands per hour)
Supply
If we β from 30 to 50 thousand, then TE on will β by $450 thousand. The MC of will, on average be
MC
Alternative Derivation of the MC curve
Supply Curve:
ππΈ=π€ βπΏΒΏ (2.5+0.25 βπΏ) βπΏ
πππΈππΏ =2.5+(2 β 0.25)βπΏ
ππ
Hence,
0 10 20 30 40 50 60 70 80 90 100 110 120 130 1400.002.505.007.50
10.0012.5015.0017.5020.0022.5025.0027.5030.0032.5035.0037.5040.00
Wage($ per hour)
Labor (thousands per hour)
Supply
MC
Suppose the demand for roughnecks (MRP) is:
π€=32.5 β 0.25βπΏ
Demand=MRP
π€π
π€πΆ
πΏπ πΏπΆ
Monopsonies pay lower wages and hire fewer workers than competitive markets
Oil rig roughnecks suspected that their employers were colluding by setting wages because wages βbarely budged during labor shortages in 1997 and in 2000 after oil prices rose and drilling companies rushed to put idled rigs into productionβ (Walsh, 2001).
Lin, Chung-Cheng. 2002. βThe Shortage of Registered Nurses in Monopsony: A New View from Efficiency Wage and Job-Hour Models, The American Economist , 46(1) Spring: 29-35
Principal Research Question:
What effect does increasing the minimum wage have on the price of restaurant meals?
Why is it important?
It tests whether the labor market for restaurant workers is competitive or monopsonistic.
βOur findings suggest that employment remains unchanged, or sometimes rises slightly, as a result of increases in the minimum wage. This conclusion poses a stark challenge to the standard textbook model of the minimum wage.''
Wage
Supply
Demand=MRP
π€πππ
π€πΆ
πΏπΆ
Illustrate the effect of the imposition of a minimum wage of labor and output markets, first assuming that both markets are competitive.
Labor
Permanent Surplus
CompetitiveLabor Market
Price
S1
D
ππππππΆ
ππΆ
Quantity
Market for Restaurant Meals
S2
ππππ
Wage
Labor
Supply
MC
Demand=MRP
π€π
π€πππ
πΏπ
Illustrate the effect of the imposition of a minimum wage of labor and output markets, first assuming that both markets are competitive.
Wage
Labor
Supply
MC
Demand=MRP
π€π
π€πππ
πΏπ
Illustrate the effect of the imposition of a minimum wage of labor and output markets, first assuming that both markets are competitive.
Wage
Labor
Supply
MC
Demand=MRP
π€π
π€πππ
Illustrate the effect of the imposition of a minimum wage of labor and output markets, first assuming that both markets are competitive.
πΏππππΏπ
Illustrate the effect of the imposition of a minimum wage of labor and output markets, first assuming that both markets are competitive.
MonopsonisticLabor Market
Price
S1
D
ππππ
ππ
ππππ
Quantity
Market for Restaurant Meals
S2
ππ
Wage
Labor
Supply
MC
Demand=MRPπ€π
π€πππ
πΏππππΏπ
Aaronson, French and MacDonald (2008) estimate the relationship between minimum wages and restaurant prices to infer whether labor markets are competitive or monopsonistic.
ππππ , π ,π¦=π½0+π½1 πππ€π ,π‘πππ+πΏπ +ππ ,π , π¦
AFMβs Empirical Model
πππ€πππ=πΌ0+πΌ1πππ’πππ‘πππ+π
% βπ€πππβπππ’πππ‘πππ=100 βπΌ1
% βπππππ% βπ€πππ =π½1
AFMβs Data
BLS restaurant-level data for 3 years, 1995-1997Fed increased from $4.25 to $5.15 over these years
ππππ , π ,π¦ πππ€π , π‘πππ
βWe find that a 10 percent increase in the minimum wage increases prices by roughly 0.7 percentβ (Aaronson, French and MacDonald, 2008, 697).
AFMβs Principal Result
οΏ½ΜοΏ½1=0.0713(0.014 )
% βπππππ% βπ€πππ β 0.07
% βπππππ=0.07 β %βπ€πππ
If
οΏ½ΜοΏ½1=0.0713(0.014 )
οΏ½ΜοΏ½1=0.0713(0.014 )
οΏ½ΜοΏ½1=0.0713(0.014 )
οΏ½ΜοΏ½1=0.0713(0.014 )
οΏ½ΜοΏ½1=0.0713(0.014 )
οΏ½ΜοΏ½1=0.0713(0.014 )
οΏ½ΜοΏ½1=0.0713(0.014 )
οΏ½ΜοΏ½1=0.0713(0.014 )