Comment On ‘Minimum wages for Ronald Mcdonald Monopsonies: A Theory of Monopsonistic Competition’

Abstract

Bhaskar and To (1999) develop a model of monopsonistic competition and solve explicitly for equilibrium. While a minimum wage set just above the unconstrained optimum leads firms to increase employment it also causes firm exit as profits fall. In this note I show that the employment and welfare effects of the minimum wage which Bhaskar and To had thought to be ambiguous when firm exit was accounted for are in fact unambiguously positive. The model can be adjusted so that the original ambiguous employment effect results. A decomposition is developed which allows us to calculate the long-run employment effect. Bhaskar and To (1999) (BT from now on) develop a model of monopsonistic competition in the labour market which models the employment and welfare effects of a minimum wage not only in the short run as other models such as Card and Krueger (1995), Manning (1995) or Rebitzer and Taylor (1995) had done, but also accounts for firm exit in the long run. The long-run employment and welfare consequences of the minimum wage, which were taken to be ambiguous in the original BT model, are shown here to be unambiguously positive. Using a decomposition of the employment effects of a minimum wage I show that BT's model can be modified in a straightforward way to show that the long-run employment effects are ambiguous. Also I show that the employment effects on an individual firm are the same in partial equilibrium as in general equilibrium where the effects of other firm's wages and firm exit are accounted for.