A minimum wage decreases total consumption in some situations but not in all situations. In a world consisting of ten poor people and a single rich person, where buying the bare minimum food costs $1/day and buying comfort costs $10/day, the only way for the poor people to get money is to work for the rich person, and he is willing to hire them for any wage up to $100/day, the equilibrium wage would be $1/day. The result is that the rich person would only be spending $20/day (his own food, the wages of the nine poor people, and his own comfort) and each poor person would be spending $1/day, their entire wage. If a minimum wage of $11/day were instituted, all the poor people would be hired for $11/day, with all ten of the people having food to survive and having comfort. Consumption would go up significantly and everyone would be better off.
This hypothetical is more an analysis on the constraints (monopoly employer, closed system, static labor supply / demand, static prices) than on the effect of the minimum wage on consumption. It ignores that the minimum wage harms both employers and employees that would be hired absent a minimum wage.
A minimum wage will be inefficient in all situations relative to a taxing more inelastic economic activity and redistributing the proceeds.
Given a monopsony employer, setting a minimum wage equal to the competitive equilibrium wage is efficient because it removes the monopsony dead weight loss.
The monopsony approach to the labor market says they’re the rule. A company doesn’t actually formally have to be the only buyer of labor power in its region to hold monopsony power.
A minimum wage decreases total consumption in some situations but not in all situations. In a world consisting of ten poor people and a single rich person, where buying the bare minimum food costs $1/day and buying comfort costs $10/day, the only way for the poor people to get money is to work for the rich person, and he is willing to hire them for any wage up to $100/day, the equilibrium wage would be $1/day. The result is that the rich person would only be spending $20/day (his own food, the wages of the nine poor people, and his own comfort) and each poor person would be spending $1/day, their entire wage. If a minimum wage of $11/day were instituted, all the poor people would be hired for $11/day, with all ten of the people having food to survive and having comfort. Consumption would go up significantly and everyone would be better off.
This hypothetical is more an analysis on the constraints (monopoly employer, closed system, static labor supply / demand, static prices) than on the effect of the minimum wage on consumption. It ignores that the minimum wage harms both employers and employees that would be hired absent a minimum wage.
A minimum wage will be inefficient in all situations relative to a taxing more inelastic economic activity and redistributing the proceeds.
Given a monopsony employer, setting a minimum wage equal to the competitive equilibrium wage is efficient because it removes the monopsony dead weight loss.
Agreed! Thanks, that is certainly the caveat I would add. In real world, monopsonies are however rare to nonexistent
The monopsony approach to the labor market says they’re the rule. A company doesn’t actually formally have to be the only buyer of labor power in its region to hold monopsony power.