Reiver

Technically, most of my comments have applied economics that would be deemed to be 'free market' orientated. My reference to monopsony is straight from neoclassical theory after all.

The reference to dynamic gains from the minimum wage, however, would be a reference to possible advantages from 'economic planning'. The profit motive will not necessarily ensure an outcome that is consistent with productivity maximisation

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Casper

It is only under a monopsony that a minimum wage higher than the market rate raises the level of employment, because a monopsony is a market form where only one buyer faces an abundance of sellers. However, in a competitive market, a minimum wage higher than the market rate leads to unemployment.

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Reiver

Totally wrong! Monopsony power only requires that firms face an upward sloping labour supply curve. That is sufficient to ensure that they have wage making power, such that there is no notion of the 'market wage'. Traditional monopsony derives it by assuming the market supply curve is also the firm's. However, we derive the same result by referring to job search. Given its difficult to secure employer-employee matches, workers will typically be underpaid. Indeed, we'd expect that underpayment to increase in apparently competitive industries (as demonstrated by the work by the likes of Burdett and Mortensen, 1998, Wage differentials, employer size, and unemployment, International Economic Review, Vol 39 Issue 2, pp 257-274)

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Casper

Okay, I read the case study. I’ll have to admit that my understanding of it was limited due to the complicated use of formulae and subject specific terminology that was used.

I understand what you mean about the notion of ‘market wage’ being non-existent in a monopsony but it can still exist if you were to compare the market in a perfect competition. This is how you can deduce if the workers are actually being underpaid or not.

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Reiver

Unfortunately for the free marketeer, perfect competition is a textbook curiosity. We used to think that, as long we had many buyers and sellers, it could be used to approximate behaviour. We now know that we cannot.

Its amusing, in economics land at least, that orthodox and heterodox economists agree that wages do not reflect worth. They're just choosy over their vocab: one man's underpayment is another man's exploitation

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Reiver

But let's just admit the obvious. The idea that we can do without the minimum wage has no economic rationale. The market utopians that suggest otherwise need to read a better comic for their materia

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Casper

Whilst it may appear to you and many others as though there is obviously no economic rationale, the point of me starting this thread was to explain how and why there is actually an underlying principle against the subsistence of a minimum wage.

However, I am open to be persuaded but I find your chief argument (i.e. that a minimum wage can increase employment) difficult to appreciate and explore. Could you not explain it in layman's terms or does its comprehension require a Masters Degree in economic and mathematics?

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Reiver

The complexity is only seen in understanding the repercussions of monopsony power for wage equilibria. We no longer can accept a "market wage" (where workers, due to the wonders are market forces, are paid according to their worth). We therefore have to model a wage distribution, reflecting differing degrees of underpayment.

The economics involved isn't difficult. It's one diddy line in supply & demand: i.e. rather than a horizontal labour supply curve set at the market wage, the firm faces an upward sloping one (i.e. its a wage maker, rather than taker). How do we derive that? We assume labour market frictions. Dave knows he's worth 20 grand. However, he doesn't know when he'll find that firm who will pay him that 20 grand. To escape the dole quicker, he'll therefore accept 10 grand. Probability informs us that his underpayment will be between 0 and 10 grand. A minimum wage in this circumstance is likely to just remove some of that underpayment. We move the economy closer to the desirable result where productivity dictates outcome.

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jamesjohn

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sweetie pie

There is already evidence to suggest that people would rather not work than be paid a pittance. It just is not worth them working as they get more on benefits etc. Getting rid of the minimum wage means even more for the tax payers to pick up in benefits and tax credits. I for one would not work for less than the minimum wage as the minimum wage is in itself low at 5.80 pounds an hour.

Does anyone think that any worker what ever his job is worth less than 5.80 pounds an hour? Do we really want to go back to the days of paying people a pittance and giving them a wage that is just short of slave labour?