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:

𝑤=2.5+0.25 ∙𝐿Where 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 ↑ from 30 to 50 thousand,

Suppose the supply of roughnecks is:

𝑤=2.5+0.25 ∙𝐿Where 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 ↑ from 30 to 50 thousand, then TE on will ↑ by $450 thousand. The MC of will, on average be

Suppose the supply of roughnecks is:

𝑤=2.5+0.25 ∙𝐿Where 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 ↑ from 30 to 50 thousand, then TE on will ↑ by $450 thousand. The MC of will, on average be

Suppose the supply of roughnecks is:

𝑤=2.5+0.25 ∙𝐿Where 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 ↑ from 30 to 50 thousand, then TE on will ↑ by $450 thousand. The MC of will, on average be

MC

Alternative Derivation of the MC curve

Supply Curve:

𝑇𝐸=𝑤 ∙𝐿¿ (2.5+0.25 ∙𝐿) ∙𝐿

𝜕𝑇𝐸𝜕𝐿

=2.5+(2 ∙ 0.25)∙𝐿

𝑚𝑐

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:

𝑤=32.5 − 0.25∙𝐿

Demand=MRP

𝑤𝑀

𝑤𝐶

𝐿𝑀 𝐿𝐶

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 “barely budged during labor shortages in 1997 and in 2000 after oil prices rose and drilling companies rushed to put idled rigs into production” (Walsh, 2001).

Lin, Chung-Cheng. 2002. “The 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.

“Our 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

𝑤𝑀𝑖𝑛

𝑤𝐶

𝐿𝐶

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

𝑃𝑀𝑖𝑛𝑃𝐶

𝑄𝐶

Quantity

Market for Restaurant Meals

S2

𝑄𝑀𝑖𝑛

Wage

Labor

Supply

MC

Demand=MRP

𝑤𝑀

𝑤𝑀𝑖𝑛

𝐿𝑀

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

𝑤𝑀

𝑤𝑀𝑖𝑛

𝐿𝑀

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

𝑤𝑀

𝑤𝑀𝑖𝑛

Illustrate the effect of the imposition of a minimum wage of labor and output markets, first assuming that both markets are competitive.

𝐿𝑀𝑖𝑛𝐿𝑀

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

𝑃𝑀𝑖𝑛

𝑃𝑀

𝑄𝑀𝑖𝑛

Quantity

Market for Restaurant Meals

S2

𝑄𝑀

Wage

Labor

Supply

MC

Demand=MRP

𝑤𝑀

𝑤𝑀𝑖𝑛

𝐿𝑀𝑖𝑛𝐿𝑀

Aaronson, French and MacDonald (2008) estimate the relationship between minimum wages and restaurant prices to infer whether labor markets are competitive or monopsonistic.  

𝑙𝑛𝑝𝑟 , 𝑠 ,𝑦=𝛽0+𝛽1 𝑙𝑛𝑤𝑠 ,𝑡𝑚𝑖𝑛+𝛿𝑠+𝜖𝑟 ,𝑠 ,𝑦

AFM’s Empirical Model

𝑙𝑛𝑤𝑎𝑔𝑒=𝛼0+𝛼1𝑒𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛+𝜀

% ∆𝑤𝑎𝑔𝑒∆𝑒𝑑𝑢𝑐𝑎𝑡𝑜𝑖𝑛

=100 ∙𝛼1

% ∆𝑝𝑟𝑖𝑐𝑒% ∆𝑤𝑀𝑖𝑛 =𝛽1

AFM’s Data

BLS restaurant-level data for 3 years, 1995-1997

Fed increased from $4.25 to $5.15 over these years

𝑙𝑛𝑝𝑟 , 𝑠 ,𝑦 𝑙𝑛𝑤𝑠 , 𝑡𝑚𝑖𝑛

“We find that a 10 percent increase in the minimum wage increases prices by roughly 0.7 percent” (Aaronson, French and MacDonald, 2008, 697).

AFM’s Principal Result

�̂�1=0.0713(0.014 )

% ∆𝑝𝑟𝑖𝑐𝑒% ∆𝑤𝑀𝑖𝑛 ≈ 0.07

% ∆𝑝𝑟𝑖𝑐𝑒=0.07 ∙ %∆𝑤𝑀𝑖𝑛

If 

�̂�1=0.0713(0.014 )

�̂�1=0.0713(0.014 )

�̂�1=0.0713(0.014 )

�̂�1=0.0713(0.014 )

�̂�1=0.0713(0.014 )

�̂�1=0.0713(0.014 )

�̂�1=0.0713(0.014 )

�̂�1=0.0713(0.014 )