Minimum Wage Debate: Should We Always Assume Perfect Competition?

Milton Friedman certainly did not like the minimum wage but in this oft noted discussion, Dr. Friedman does not assume that labor markets are perfectly competitive:

You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand and the special interests on the other. The minimum wage law is as clear a case as you could want. The special interests are, of course, the trade unions, the monopolistic craft trade unions in particular. The do-gooders believe that by passing a law saying that nobody shall get less than $2 an hour or $2.50 an hour, or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed.

Dr. Friedman did not consider market power on the other side of the employment equation in this discussion and Amit Varma must have never heard of monopsony power.




Amit and Don Boudreaux heart something that Congressman Bill Sali said in opposition to raising the minimum wage:

Mr. Speaker, a number of my colleagues have pointed out the problems with raising the minimum wage; that it is an unfunded mandate on small business, will likely result in the loss of over 1 million jobs for low wage earners, that it will eliminate entry level jobs and actually hurt the poor more than it helps them. The negative impacts will result naturally from the rules and principles of the free market. In my college courses, I learned that the rules and principles of free markets are the rules and principles that every business and worker are subject to in every transaction, every negotiation and every new idea. That is, those negative effects of this bill are unavoidable with its passage. In spite of the negative effects, this bill does seem destined to pass.

The Congressman from Idaho offers no empirical evidence that increases in the minimum wage leads to massive employment losses. Many labor economists would argue that it does not reduce employment by nearly that much. Most labor economists also recognize the possibility that there may be sectors where monopsony power does not exist. I would hope Don Boudreaux would one day catch up with what most labor economists have known for years.