ECON 139 SP 15 Antonovics 4 4 21 15 1 April 21 2015 Profit Maximization How do you draw the labor demand curve for a monopsonist The monopsonist simultaneously picks w and E so there is no labor demand curve for a monopsonist Comparison with Perfect Competition The firm is better off In a monopsonistic labor market W VMPE Fewer people are hired than in a perfectly competitive market and wages are lower Page 1 of 20 This is because the marginal cost of hiring an additional worker is higher for a monopsonist than for a perfectly competitive firm Workers worse off relative to perfectly competitive labor market Sport Economics Monopsony in Professional Sports Sports owners are a small and interconnected group Possibly can band together and act as monopsonists Main issue here is that the owners can set wages that is wages are not determined by perfect competition Two implications The greater is a league s monopsony power the lower will be player salaries Players will be paid below their VMPE Note in the reading they call the value of the marginal product of labor the marginal revenue product of labor Page 2 of 20 Salaries of Major League Baseball Players 1876 1920 From around 1876 1881 since professional players can t decide where they wanted to go after contract ended as there was only one team their wages dropped After 1882 when the American Association started the market became competitive so the players wages went up After 1891 Major League players wages dropped again until another league entered Evidence on the Degree of Monopsonistic Exploitation If an employer is a monopsony then workers are paid less than the value of marginal product of labor How does the value of the marginal product of labor for players compare with their salary Two steps Calculate how various measures of player performance affect a team s winning percentage MPE Calculate how a team s winning percentage affects revenue p Page 3 of 20 VMPE p MPE Estimates Late 1960s players paid 15 20 of VMPE Late 1980s players paid 29 45 of VMPE Reserve clause effectively ends in 1976 Minimum Wage Laws State can set minimum wages higher than federal s but can t be lower Federal minimum wage in 2009 7 25 hour California minimum wage as of January 2014 is 9 00 hour Not all sectors are covered Farm workers employed on small farms Employees of seasonal recreational establishments Salespeople at automobile dealerships In 2012 4 7 percent of workers earned at or below the Federal minimum wage BLS Page 4 of 20 Theoretical Effect of Minimum Wage Laws Perfect Competition Minimum wages are a type of price floor Effectively change supply curve Decrease employment Extent to which demand drops depends on the elasticity of labor demand o Good more wage if you stay in the job o Bad employment level decrease Monopsony and Minimum Wages When minimum wage laws are implemented in a monopsonistic market then employment may actually increase Before E the cost of hiring one additional worker is the minimum wage The area of the yellow circle means new MCE old MCE Page 5 of 20 Page 6 of 20 What is the Effect of the Minimum Wage on Employment Issues to consider We observe wages and employment not supply demand Other changes in the economy also affect employment Need Variation Sources of Minimum Wage Variation Page 7 of 20 State to state variation in the nominal and real value of the minimum wage Can relate state variation in real value of minimum wage to state variation in employment rates Time series variation in nominal and real minimum wage Can relate variation over time in the real value of the minimum wage with variation over time in employment rates Page 8 of 20 The Ideal Study Design Control group not getting the drugs What would be the ideal way to study the effect an increase in minimum wage on employment How might a doctor test the effectiveness of a new drug Why would the doctor have a control group How would you design a randomized experiment to study the effect of a minimum wage Study by Card and Krueger Can t conduct a randomized experiment Alternatively use natural experiments Prior to April 1992 the minimum wage in NJ and PA was 4 25 hour April 1 1992 NJ raises its minimum wage to 5 05 hour The minimum wage in PA doesn t change Data Collection Survey 400 fast food establishments Burger King Roy Rogers KFC Wendy s etc New Jersey and Pennsylvania Asked them number of full time and part time employees Before March 1992 After December 1992 Page 9 of 20 ECON 139 SP 15 Antonovics 4 4 23 15 10 April 23 2015 Implications of Card and Krueger Study Suggests that the labor demand curve is upward sloping Monopsony Inconsistent with observed increases in the price of fast food after the increase in the minimum wage Hungry teenager theory Teenager minimum wage increase increase demand for hamburger more hamburger more labor Criticisms of the Card and Krueger Study No attempt to collect data on hours worked Big drop in employment in PA over 8 month time period Overall increase masks huge variation in both directions Measurement error if you replicate Card and Krueger s study with administrative data the estimated effect on employment is negative Response may be different in fast food restaurants than other establishments Effects might be larger over a longer time horizon Page 10 of 20 What are we to make of minimum wage laws Theoretically they can reduce employment rates But there are a number of empirical studies that suggest that increases in the minimum wage lead increase employment Clemens and Wither 2014 decreasing employment decreasing income growth Still not clear that increases in the minimum wage are the best means of fighting poverty a large fraction of the people who benefit from increases in the minimum wage are teenagers from households that are not poor It s a blunt instrument Since a large amount of them are teenagers so might not be the best way Living Wage Campaigns Currently Very Active A total of 130 places have living wage ordinances and living wage campaigns are underway in another 119 cities counties and universities Page 11 of 20 Impact of Living Wage Law Theoretical effects are complex because living wages only cover a relatively small number of companies Covered sector Non covered sector Debate over whether living wage ordinances decrease employment Some evidence that they reduce poverty Who really pays for living wage ordinance Unknown To what extent might employers cut back on other benefits Unknown Still an area of