ECON 426 Lecture Notes - Lecture 15: Deadweight Loss, Monopsony, Mangalore Refinery And Petrochemicals Limited
Firms don't make profits
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Prices = minimum average costs
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In competitive equilibrium:
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Prices have to increase
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The % change in price = to the share in the minimum wage in total costs of production
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If the minimum wage increases, then:
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Prices increase by about this amount
▪
Elasticity of restaurant prices w.r.t. the minimum wage is about 0.04 - 0.1
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This seems like a small number - but the price of the product in the grocery store is the
wholesale price, not retail
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If the minimum wage goes up, most of the increase in that minimum wage will be passed
into the prices in the grocery store
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In grocery stores it's about 0.02 (Renkin 2017)
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→means empirical evidence is consistent with the competitive equilibrium solution
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This increase in the minimum wage isn't paid out of pockets of the firm, but prices that
consumers pay - including those people you're trying to help by raising the minimum wage
A.
Gross income may increase - but how much of this increase in gross income will be eaten up
by this change in prices?
B.
Welfare side?
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Empirical evidence is roughly consistent with that:
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The margin increases by the amount of the share of minimum wage in the total costs of grocery
stores
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This doesn't included the changing prices of other types of goods
▪
Just because of changes in grocery store prices, the income gains are reduced by 10%
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The people who earn the minimum wage spend a good amount of their income on the
goods being produced by other minimum wage earners
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A mix of high and low-skill workers in this production process should make the price
effects smaller
□
e.g. they consumer larger fractions of their income on goods that have a high share of low-
skilled labor in their production
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Why is this reduction so large?
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So, by raising the minimum wage, you're raising gross income but taking it away through
equilibrium and prices effects in the market
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Renkin (2017) suggest that the increase in prices in grocery stores alone reduces nominal income gains
by minimum wage recipients by about 10%
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Monopsony - when there's market power in the labor market
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Why do we raise the minimum wage?
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Who Pays for the Minimum Wage?
Marginal worker schedule
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The firm considers the MC of Labor; since it’s a Monopsonist, the MC of labor isn't = to the wage
of the last worker only, but what you have to pay the other workers in addition
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The monopsonist will choose employment at a level where the MCL = MRPL
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Monopsonists set employment below the efficient employment level
•
There's a dead-weight loss that occurs because the MRP is higher than the asking wage of the marginal
worker
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A minimum wage prevents a Monopsonist from taking advantage of its market power
In the monopsonist case, a minimum wage might increase employment, reducing the deadweight loss
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Monopsony
Lecture 15 - Minimum Wage 2
Monday, March 12, 2018
4:06 PM
ECON 426 Page 1
A minimum wage prevents a Monopsonist from taking advantage of its market power
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As long as it doesn't exceed the MRP
▪
By forcing the Monopsonist to pay a higher wage, they will hire as many workers as they can hire
at that higher wage
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If this was a competitive market, C would represent the equilibrium wage and labor
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Monopsonist employs 100 individuals at the wage 8 in this model
▪
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Costs are higher - just not on the margin
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And for the hiring decisions, it's all on the margin
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The total cost for the minimum wage is higher, but this doesn't mean the marginal cost is higher
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You've already accumulated a total cost that is constantly increasing, so you don't have a very
large marginal cost
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But, if you start from a very low cost (no minimum wage) then you have very large marginal costs
that increase with additional labor
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Monopsonist Case with a Minimum Wage
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MRPL - at each wage, how much labor the Monopsonist is willing to hire
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Everyone must be paid the incremental increase, hence the jump from M0 to B
▪
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MS point is what the monopsonist would choose in the absence of a minimum wage
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If you hire an additional worker, you have to pay him the minimum wage
▪
But, hiring an additional worker wouldn't increase the wage that you have to pay to all the
inframarginal workers
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Means that the MCL schedule for a Monopsonist will be more horizontal until it hits the
labor supply curve - at this point, it jumps up to the original MCL schedule
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Then, it continues on the original cost of labor
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If you institute a minimum wage, then the MCL, until you hit the supply of labor curve, is just the
minimum wage
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If you try to hire more workers than is optimal, you must increase your wage on everybody
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Why does it jump up, i.e., where does this discontinuity come from?
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ECON 426 Page 2
Document Summary
The % change in price = to the share in the minimum wage in total costs of production. Elasticity of restaurant prices w. r. t. the minimum wage is about 0. 04 - 0. 1. In grocery stores it"s about 0. 02 (renkin 2017) This seems like a small number - but the price of the product in the grocery store is the wholesale price, not retail. If the minimum wage goes up, most of the increase in that minimum wage will be passed into the prices in the grocery store. Means empirical evidence is consistent with the competitive equilibrium solution. This increase in the minimum wage isn"t paid out of pockets of the firm, but prices that consumers pay - including those people you"re trying to help by raising the minimum wage. Renkin (2017) suggest that the increase in prices in grocery stores alone reduces nominal income gains by minimum wage recipients by about 10%