Monopsony
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Transcript of Monopsony
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: ๐ค=2.5+0.25 โ๐ฟ
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 โ from 30 to 50 thousand,
Suppose the supply of roughnecks is: ๐ค=2.5+0.25 โ๐ฟ
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 โ from 30 to 50 thousand, then TE on will โ by $450 thousand. The MC of will, on average be
Suppose the supply of roughnecks is: ๐ค=2.5+0.25 โ๐ฟ
Where w is their hourly wage and L is measured in thousands of roughnecks per hour.
0 10 20 30 40 50 60 70 80 90 100 110 120 130 1400.002.505.007.50
10.0012.5015.0017.5020.0022.5025.0027.5030.0032.5035.0037.5040.00
Wage($ per hour)
Labor (thousands per hour)
Supply
If we โ from 30 to 50 thousand, then TE on will โ by $450 thousand. The MC of will, on average be
Suppose the supply of roughnecks is: ๐ค=2.5+0.25 โ๐ฟ
Where w is their hourly wage and L is measured in thousands of roughnecks per hour.
0 10 20 30 40 50 60 70 80 90 100 110 120 130 1400.002.505.007.50
10.0012.5015.0017.5020.0022.5025.0027.5030.0032.5035.0037.5040.00
Wage($ per hour)
Labor (thousands per hour)
Supply
If we โ from 30 to 50 thousand, then TE on will โ by $450 thousand. The MC of will, on average be
MC
Alternative Derivation of the MC curve
Supply Curve:
๐๐ธ=๐ค โ๐ฟยฟ (2.5+0.25 โ๐ฟ) โ๐ฟ
๐๐๐ธ๐๐ฟ =2.5+(2 โ 0.25)โ๐ฟ
๐๐
Hence,
0 10 20 30 40 50 60 70 80 90 100 110 120 130 1400.002.505.007.50
10.0012.5015.0017.5020.0022.5025.0027.5030.0032.5035.0037.5040.00
Wage($ per hour)
Labor (thousands per hour)
Supply
MC
Suppose the demand for roughnecks (MRP) is:
๐ค=32.5 โ 0.25โ๐ฟ
Demand=MRP
๐ค๐
๐ค๐ถ
๐ฟ๐ ๐ฟ๐ถ
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 โbarely budged during labor shortages in 1997 and in 2000 after oil prices rose and drilling companies rushed to put idled rigs into productionโ (Walsh, 2001).
Lin, Chung-Cheng. 2002. โThe 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.
โOur 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
๐ค๐๐๐
๐ค๐ถ
๐ฟ๐ถ
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
๐๐๐๐๐๐ถ
๐๐ถ
Quantity
Market for Restaurant Meals
S2
๐๐๐๐
Wage
Labor
Supply
MC
Demand=MRP
๐ค๐
๐ค๐๐๐
๐ฟ๐
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
๐ค๐
๐ค๐๐๐
๐ฟ๐
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
๐ค๐
๐ค๐๐๐
Illustrate the effect of the imposition of a minimum wage of labor and output markets, first assuming that both markets are competitive.
๐ฟ๐๐๐๐ฟ๐
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
๐๐๐๐
๐๐
๐๐๐๐
Quantity
Market for Restaurant Meals
S2
๐๐
Wage
Labor
Supply
MC
Demand=MRP๐ค๐
๐ค๐๐๐
๐ฟ๐๐๐๐ฟ๐
Aaronson, French and MacDonald (2008) estimate the relationship between minimum wages and restaurant prices to infer whether labor markets are competitive or monopsonistic.
๐๐๐๐ , ๐ ,๐ฆ=๐ฝ0+๐ฝ1 ๐๐๐ค๐ ,๐ก๐๐๐+๐ฟ๐ +๐๐ ,๐ , ๐ฆ
AFMโs Empirical Model
๐๐๐ค๐๐๐=๐ผ0+๐ผ1๐๐๐ข๐๐๐ก๐๐๐+๐
% โ๐ค๐๐๐โ๐๐๐ข๐๐๐ก๐๐๐=100 โ๐ผ1
% โ๐๐๐๐๐% โ๐ค๐๐๐ =๐ฝ1
AFMโs Data
BLS restaurant-level data for 3 years, 1995-1997Fed increased from $4.25 to $5.15 over these years
๐๐๐๐ , ๐ ,๐ฆ ๐๐๐ค๐ , ๐ก๐๐๐
โWe find that a 10 percent increase in the minimum wage increases prices by roughly 0.7 percentโ (Aaronson, French and MacDonald, 2008, 697).
AFMโs Principal Result
๏ฟฝฬ๏ฟฝ1=0.0713(0.014 )
% โ๐๐๐๐๐% โ๐ค๐๐๐ โ 0.07
% โ๐๐๐๐๐=0.07 โ %โ๐ค๐๐๐
If
๏ฟฝฬ๏ฟฝ1=0.0713(0.014 )
๏ฟฝฬ๏ฟฝ1=0.0713(0.014 )
๏ฟฝฬ๏ฟฝ1=0.0713(0.014 )
๏ฟฝฬ๏ฟฝ1=0.0713(0.014 )
๏ฟฝฬ๏ฟฝ1=0.0713(0.014 )
๏ฟฝฬ๏ฟฝ1=0.0713(0.014 )
๏ฟฝฬ๏ฟฝ1=0.0713(0.014 )
๏ฟฝฬ๏ฟฝ1=0.0713(0.014 )