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Monopsony in the Labor Market, Minimum Wages and the Time Horizon: Some Unresolved Issues

Author

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  • Friedrich L. Sell

    (Universität der Bundeswehr München)

  • Ernst K. Ruf

    (UniCredit Group)

Abstract

This article discusses development of optimal solutions for monopsony in the labour market for the long run (when labour and capital are both flexible). It is shown that binding minimum wages up to a certain degree pushes the monopsonists to choose a high capital intensity of production, just as high as or even higher than that chosen when there is no regulation for minimum wages. Thereby, we demonstrate the existence of re-switching effects in the tradition of Piero Sraffa. The second part of the paper recalculates and analyzes earlier results by making use of the rather general constant elasticity of substitution production function. Based on a numerical solution for optimal monopsony under different regimes (no minimum wage, minimum wages of different values, etc.), we formulate a two-period game between the government and the monopsonistic firm (‘minimum wage game’). Finally, we analyze the relationship between the elasticity of substitution on the one hand and likely levels of employment on the other hand, after introduction of minimum wages.

Suggested Citation

  • Friedrich L. Sell & Ernst K. Ruf, 2016. "Monopsony in the Labor Market, Minimum Wages and the Time Horizon: Some Unresolved Issues," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 44(1), pages 75-90, March.
    • Handle: RePEc:kap:atlecj:v:44:y:2016:i:1:d:10.1007_s11293-016-9484-8
    DOI: 10.1007/s11293-016-9484-8
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    References listed on IDEAS

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    1. Pierre Cahuc & Guy Laroque, 2014. "Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(2), pages 259-273, April.
    2. William M. Boal & Michael R. Ransom, 1997. "Monopsony in the Labor Market," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 86-112, March.
    3. David Neumark & William L. Wascher, 2008. "Minimum Wages," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262141027, April.
    4. Barr, Tavis & Roy, Udayan, 2008. "The effect of labor market monopsony on economic growth," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1446-1467, December.
    5. Alan Manning, 2006. "A Generalised Model of Monopsony," Economic Journal, Royal Economic Society, vol. 116(508), pages 84-100, January.
    6. Bertram Schefold, 2005. "Reswitching As A Cause Of Instability Of Intertemporal Equilibrium," Metroeconomica, Wiley Blackwell, vol. 56(4), pages 438-476, November.
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    Cited by:

    1. Friedrich L. Sell, 2022. "The Portuguese Dilemma of Unstable Pensions," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(6), pages 394-398, November.

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