CRIEFF Discussion Paper Number 9921

Monopsony, Efficiency Wages and Minimum Wages

Felix R. FitzRoy

Abstract
Monopsony models imply that wages must be raised whenever additional workers are hired, and firms have permanent vacancies at existing wages. There is no evidence for this in low-wage markets, and our case study indicates a permanent queue of applicants, so one popular explanation for the apparent lack of negative employment effects of minimum wages is unconvincing. Both convex adjustment costs and efficiency wage models with unemployment benefits and taxes, or a competitive model with compensating effort to maintain utility suggest that a positive employment effect of a small minimum wage is possible, but rather unlikely.

JEL Classifications
J41, J42, J65

Keywords
Monopsony, Efficiency wage, Minimum wage, effort

Felix R. FitzRoy
CRIEFF

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