Monopsony in the labor market, minimum wages and the time horizon: Some unresolved issues

On the background of the intense discussion in Europe on the effects of minimum wages on employment, the paper intends to clarify the short-run and the long-run implications of minimum wages for employment, when we find the market form of monopsony on the labor market. The paper develops the optimal solutions for the monopsony on the labor market, both for the short run (only labor is flexible) and for the long-run (capital is now flexible, too) with numerical examples based on earlier work of T. Barr (2005). It is shown that binding minimum wages of a certain degree push the monopsonist to choose a high capital intensity of production: just as high as or even higher than the one he chooses when he is not regulated by minimum wages. Thereby, we demonstrate the existing of re-switching effects in the tradition of Piero Sraffa when analyzing the choice of factor intensities by the monopsony. The second part of the paper generalizes the results achieved in the first part by making use of the quite general CES production function. 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 - is analyzed in a sensitivity analysis. Finally, we suggest a new valuation of minimum wages with regard to their stabilizing properties vis-à-vis to monopsonies. We put forward a straightforward competition policy design which aims at fighting monopsonies instead of hoping for positive employment effects in the presence of minimum wages.