Econ 330: Urban Economics

# Econ 330: Urban Economics
## Lecture 13
### John Morehouse
### 20 February, 2020

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# Lecture 13: Minimum Wage, Monopsony & Empirics

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## Today

1) .hi.purple[Monopsony]

2) .hi.purple[Discussion]

3) .hi.purple[Empirics]

## Upcoming

- .hi.slate[HW3 due Feb 25th (one week)]
  
  - .hi.slate[Reading] (Chapter 9)

---

# Competitive Model

We built up labor .hi[supply] and .hi[demand]. Where do these come from?

- Demand: Firms
  
  - Supply: Workers

What did we assume about the market structure?

- .hi[Perfect Competition]

---

We built up labor .hi[supply] and .hi[demand]. Where do these come from?

- Demand: Firms
  
  - Supply: Workers

What did we assume about the market structure?

- .hi[Perfect Competition]

- Firms pay workers their MV of labor (max WTP)
  
  
--

Probably not super reasonable

---

# Monopsony

Let's consider a different labor market structure:

<center>
<font size="15"> Monopsony </font>
</center>

- We say a firm is a .hi[monopsonist] if they are .hi.purple[the only employer] of labor in the area (city)

- We say a firm has .hi[monopsony power] if they have the ability to influence the market wage

- Not to be confused with __monopoly__ (in which there is only one .hi.purple[seller] of a good)
  
  - __Monopsony__ has to do with one .hi.purple[buyer] of a good 
  
--

---

# Examples of Monopsonys

Can you think of any?

- Universities (go GTFF!)

- Coal Towns

- Amazon / Walmart Towns?

---

# Monopsony

So what do you think the main consequence(s) of .hi[monopsony] are?

<center>
<font size="15"> Monopsonists have the ability to pay a wage below the marginal value </font>
</center>

The consequences?

- .pink[Higher profit] for the firms

- Deadweight loss (inefficient outcome)

We will formalize this in a few slides, but first lets go over some evidence of local monopsonys

---

# Monopsony: Formalizing the Result

In the competive model, the firm pays the worker `$w = MRP_l$`.

- Is this what the monopsonist would do?

- Where is this?

---

# Recall: The competitive model

Remember: in the competitve model, the firm seeks to maximize profits (but does not influence prices).

- The competitive firm hires labor until the marginal profit w.r.t to labor is zero
  
`\begin{align*}
\pi &= TR - TC\\
\pi &= TR - wL - rK
\end{align*}`

Profit maxing cond: `$\frac{\Delta \pi}{\Delta L} = 0 \implies MRP_L -w = 0 \implies w = MRP_L$`

---

# Monopsony: Formalizing the Result

With a monopsonist, the amount of labor they hire influences the wage. That is, now

--
`\begin{align*}
\pi &= TR - w(L)L - rK
\end{align*}`
--

where `$w(L)$` is an .pink[increasing function] of the .pink[amount of labor hired]

- The firm should hire labor until marginal cost is equalized to marginal benefit (.hi.purple[same as before])
  
  - or: _.pink[marginal profit] wrt labor_ is equal to zero
  
`\begin{align*}
\frac{\Delta \pi}{\Delta L} =0 
\end{align*}`

--
---

# Monopsony: Formalizing the Result

Notation: `$TC(L) =w(L)*L$` is the TC from labor in monopsony (__note__: `$w(L)$` wage is a function of labor)

`\begin{align*}
\pi &= TR - TC(L) - rK
\end{align*}`

Profit Maximization:

`\begin{align*}
\frac{\Delta \pi}{\Delta L} &=0
\end{align*}`

---

Notation: `$TC(L) =w(L)*L$` is the TC from labor in monopsony (__note__: `$w(L)$` wage is a function of labor)

`\begin{align*}
\pi &= TR - TC(L) - rK
\end{align*}`

Profit Maximization:

`\begin{align*}
\frac{\Delta \pi}{\Delta L} &=0\\
MRP_L - \frac{\Delta TC(L)}{\Delta L} &= 0\\
\end{align*}`

---

Notation: `$TC(L) =w(L)*L$` is the TC from labor in monopsony (__note__: `$w(L)$` wage is a function of labor)

`\begin{align*}
\pi &= TR - TC(L) - rK
\end{align*}`

Profit Maximization:

`\begin{align*}
\frac{\Delta \pi}{\Delta L} &=0\\
MRP_L - \frac{\Delta TC(L)}{\Delta L} &= 0\\
MRP_L &= \frac{\Delta TC(L)}{\Delta L}\\
MRP_L & = MC_L
\end{align*}`

---

So the monoposonist hires until:

`\begin{align*}
MRP_L & = MC_L
\end{align*}`

Compared to the competitve outcome:

`\begin{align*}
MRP_L & = W
\end{align*}`

.hi[Important:] Note that in the competitive model, marginal cost of labor was constant (and equal to wage).

---

So the monoposonist hires until:

`\begin{align*}
MRP_L & = MC_L
\end{align*}`

Compared to the competitve outcome:

`\begin{align*}
MRP_L & = W
\end{align*}`

.hi[Important:] Note that in the competitive model, marginal cost of labor was constant (and equal to wage).

- Now: marginal cost is increasing because monopsonist is _only_ buyer of labor

---

# An Example:
.center[**Monopsonist Wage Schedule**]
<table class="table table-striped" style="margin-left: auto; margin-right: auto;">
<caption></caption>
 <thead>
  <tr>
   <th style="text-align:center;"> .pink[Wage] </th>
   <th style="text-align:center;"> .purple[Labor] </th>
   <th style="text-align:center;"> TC </th>
   <th style="text-align:center;"> .hi[MC] </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;line-height: 110%;"> 1 </td>
   <td style="text-align:center;line-height: 110%;"> 1 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;line-height: 110%;"> 2 </td>
   <td style="text-align:center;line-height: 110%;"> 2 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 3 </td>
   <td style="text-align:center;"> 3 </td>
   <td style="text-align:center;">  </td>
   <td style="text-align:center;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 4 </td>
   <td style="text-align:center;"> 4 </td>
   <td style="text-align:center;">  </td>
   <td style="text-align:center;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 5 </td>
   <td style="text-align:center;"> 5 </td>
   <td style="text-align:center;">  </td>
   <td style="text-align:center;">  </td>
  </tr>
</tbody>
</table>

Let's fill in the table. What do you notice?

---

count: false
# An Example:
.center[**Monopsonist Wage Schedule**]
<table class="table table-striped" style="margin-left: auto; margin-right: auto;">
<caption></caption>
 <thead>
  <tr>
   <th style="text-align:center;"> .pink[Wage] </th>
   <th style="text-align:center;"> .purple[Labor] </th>
   <th style="text-align:center;"> TC </th>
   <th style="text-align:center;"> .hi[MC] </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;line-height: 110%;"> 1 </td>
   <td style="text-align:center;line-height: 110%;"> 1 </td>
   <td style="text-align:center;line-height: 110%;"> 1 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;line-height: 110%;"> 2 </td>
   <td style="text-align:center;line-height: 110%;"> 2 </td>
   <td style="text-align:center;line-height: 110%;"> 4 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 3 </td>
   <td style="text-align:center;"> 3 </td>
   <td style="text-align:center;"> 9 </td>
   <td style="text-align:center;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 4 </td>
   <td style="text-align:center;"> 4 </td>
   <td style="text-align:center;"> 16 </td>
   <td style="text-align:center;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 5 </td>
   <td style="text-align:center;"> 5 </td>
   <td style="text-align:center;"> 25 </td>
   <td style="text-align:center;">  </td>
  </tr>
</tbody>
</table>

Let's fill in the table. What do you notice?

---

count: false
# An Example:
.center[**Monopsonist Wage Schedule**]
<table class="table table-striped" style="margin-left: auto; margin-right: auto;">
<caption></caption>
 <thead>
  <tr>
   <th style="text-align:center;"> .pink[Wage] </th>
   <th style="text-align:center;"> .purple[Labor] </th>
   <th style="text-align:center;"> TC </th>
   <th style="text-align:center;"> .hi[MC] </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;line-height: 110%;"> 1 </td>
   <td style="text-align:center;line-height: 110%;"> 1 </td>
   <td style="text-align:center;line-height: 110%;"> 1 </td>
   <td style="text-align:center;line-height: 110%;"> 1 </td>
  </tr>
  <tr>
   <td style="text-align:center;line-height: 110%;"> 2 </td>
   <td style="text-align:center;line-height: 110%;"> 2 </td>
   <td style="text-align:center;line-height: 110%;"> 4 </td>
   <td style="text-align:center;line-height: 110%;"> 3 </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 3 </td>
   <td style="text-align:center;"> 3 </td>
   <td style="text-align:center;"> 9 </td>
   <td style="text-align:center;"> 5 </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 4 </td>
   <td style="text-align:center;"> 4 </td>
   <td style="text-align:center;"> 16 </td>
   <td style="text-align:center;"> 7 </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 5 </td>
   <td style="text-align:center;"> 5 </td>
   <td style="text-align:center;"> 25 </td>
   <td style="text-align:center;"> 9 </td>
  </tr>
</tbody>
</table>

Let's fill in the table. What do you notice?

At .pink[every level of labor], the .purple[marginal cost of labor] exceeds the .pink[wage]

---

# Graph of Monopsony

---

# Monopsony and Minimum Wage

- So we saw the .pink[monoposonist] outcome leads to .hi[lower employment and wages] than the .pink[competitive outcome].

- In perfect competition, what happens to unemployment with a minimum wage?

---

- So we saw the .pink[monoposonist] outcome leads to .hi[lower employment and wages] than the .pink[competitive outcome].

- In perfect competition, what happens to unemployment with a minimum wage?

- It .pink[increases]. Labor supply outstrips labor demand
  
--

- Is it the same with a monopsony? No!

---

# Minimum Wage Graph

---

- Monopsony Outcome vs Competitive Outcome
  
  - Min wage in monopsony

2) .hi.purple[Discussion]

]

3) .hi.purple[Empirics]

]

---
# Discussion

- .purple[Structure of labor market] leads to .pink[two different effects] for the same policy

- In reality, most labor markets are somewhere in between perfect competition and monopsony

- The more competitive a market is, more likely that minimum wage will increase unemployment

---

# A Brief History Lesson

.col-left[
- __1894__: New Zealand enacts the [Industrial Concilation and Arbitration Act](https://en.wikipedia.org/wiki/Industrial_Conciliation_and_Arbitration_Act_1894)

- Worlds first Min wage!

]

]

---

.col-left[
- .ex[__1894__: New Zealand enacts the [Industrial Concilation and Arbitration Act](https://en.wikipedia.org/wiki/Industrial_Conciliation_and_Arbitration_Act_1894)]

- .ex[Worlds first Min wage!]
  
- __1912__: Massachusetts enacts the .pink[first minimum wage in the US]. Other states follow

]

]

---

.col-left[
- .ex[1894: New Zealand enacts the [Industrial Concilation and Arbitration Act](https://en.wikipedia.org/wiki/Industrial_Conciliation_and_Arbitration_Act_1894)]

- .ex[Worlds first Min wage!]
  
- .ex[__1912__: Massachusetts enacts the .pink[first minimum wage in the US]. Other states follow]

-  __1938__: [Fair Labor Standards Act](https://www.dol.gov/agencies/whd/flsa) (25 cents per hour .hi[federal] minimum wage)

]

]

---

.col-left[
- .ex[1894: New Zealand enacts the [Industrial Concilation and Arbitration Act](https://en.wikipedia.org/wiki/Industrial_Conciliation_and_Arbitration_Act_1894)]

- .ex[Worlds first Min wage!]
  
- .ex[__1912__: Massachusetts enacts the .pink[first minimum wage in the US]. Other states follow]

-  .ex[__1938__: [Fair Labor Standards Act](https://www.dol.gov/agencies/whd/flsa) (25 cents per hour .hi[federal] minimum wage)]

]

- __1968__: Federal Minimum Wage reaches .hi[peak purchasing power] at $1.60 per hour ($11.53 in 2019 dollars) 🤯

]

---

.col-left[
- .ex[1894: New Zealand enacts the [Industrial Concilation and Arbitration Act](https://en.wikipedia.org/wiki/Industrial_Conciliation_and_Arbitration_Act_1894)]

- .ex[Worlds first Min wage!]
  
- .ex[__1912__: Massachusetts enacts the .pink[first minimum wage in the US]. Other states follow]

-  .ex[__1938__: [Fair Labor Standards Act](https://www.dol.gov/agencies/whd/flsa) (25 cents per hour .hi[federal] minimum wage)]

]

- .ex[__1968__: Federal Minimum Wage reaches .hi[peak purchasing power] at $1.60 per hour ($11.53 in 2019 dollars) 🤯]

-  __2009__: Min wage is $ 7.25 an hour

-  __2019__: 29 states have a higher minimum wage than federal

]

---

# Thoughts

So what do you think? Is minimum wage good? Is it bad? .hi.purple[Discuss]

.hi[Note]: The question _is minimum wage good?_ is __not__ a good question. Good is normative. Better:

- Does minimum wage impact all low wage workers .pink[equally?]

- Does minimum wage .pink[cause] increases in .purple[unemployment?]

- Does minimum wage lead to firms reducing other, non-mandated benefits?

Above questions: quantifiable, with answers that can be answered empirically

---

- Monopsony Outcome vs Competitive Outcome
  
  - Min wage in monopsony

2) .hi[Discussion] ✅

]

3) .hi.purple[Empirics]

]

---

# Introduction

We are going to talk about .pink[causality].

Some of these notes are based on written by [Ed Rubin](http://edrub.in/) & [Kyle Raze](https://kyleraze.com/)

---

# Introduction

Hisotrically, social sciences had limited data to study policy questions.

__Result__: Social sciences were .pink[theoretical] fields

- Economists used .purple[mathematical models]
  - Sociologists developed .pink[qualitative theories]
  - Both used their theories to make policy reccomendations

---

Hisotrically, social sciences had limited data to study policy questions.

__Result__: Social sciences were .pink[theoretical] fields

- Economists used .purple[mathematical models]
  - Sociologists developed .pink[qualitative theories]
  - Both used their theories to make policy reccomendations

__Problem__: Theories can be (and often are) wrong

- 5 economists often have 5 answers to .pink[the same question]
  - Leads to a politicization of questions that, in principle, have scientific answers (ie: does minimum wage cause increased in unemployment?)

---

# Nowadays

.hi.purple[Today]: social sciences are increasingly .pink[empirical] thanks to the growing availability of data

- Ability to test and improve theories using real data
  
  - Data driven answers `$\implies$` less politicization

---

# Discussion

The economists toolkit:

- .hi[Empirics]: tells us what actually happened
  
  - .hi.purple[Theory]: helps us understand why things happened the way they did
  
--

__Be careful in distinguishing:__

- empirical facts such as _.pink[average unemployment was lower after minimum wage was placed]_
  
--

- empirical or theoretical claims (supported by facts) such as: _.purple[average unemployment was lower] .hi.purple[because] .purple[of minimum wage]_ or
  
    -  _average unemployment was lower after minimum wage was placed .pink[because] the market was a monosopsony_

---

# Path to Causality

Suppose we want to answer the question:

_Does minimum wage lead to increases in unemployment_? What is the _ideal_ comparision? (experiment)

---

Suppose we want to answer the question:

_Does minimum wage lead to increases in unemployment_? What is the _ideal_ comparision? (experiment)
 
## The Ideal Experiment

1) .pink[Implement minimum wage] (in say NJ -- this will give us the causal effect in NJ only).

---

Suppose we want to answer the question:

_Does minimum wage lead to increases in unemployment_? What is the _ideal_ comparision? (experiment)
 
## The Ideal Experiment

1) .pink[Implement minimum wage] (in say NJ -- this will give us the causal effect in NJ only).

2) Compute unemployment in NJ .purple[post minimum wage], call it `$u_{\text{min wage}, NJ}$`

---

Suppose we want to answer the question:

_Does minimum wage lead to increases in unemployment_? What is the _ideal_ comparision? (experiment)
 
## The Ideal Experiment

1) .pink[Implement minimum wage] (in say NJ -- this will give us the causal effect in NJ only).

2) Compute unemployment in NJ .purple[post minimum wage], call it `$u_{\text{min wage}, NJ}$`

3) Have a .hi[parallel universe] in which you did .pink[not implement min wage] in NJ. Compute `$u_{\text{no min wage}, NJ}$`

---

Suppose we want to answer the question:

_Does minimum wage lead to increases in unemployment_? What is the _ideal_ comparision? (experiment)
 
## The Ideal Experiment

1) .pink[Implement minimum wage] (in say NJ -- this will give us the causal effect in NJ only).

2) Compute unemployment in NJ .purple[post minimum wage], call it `$u_{\text{min wage}, NJ}$`

3) Have a .hi[parallel universe] in which you did .pink[not implement min wage] in NJ. Compute `$u_{\text{no min wage}, NJ}$`

4) .hi[Treatment effect] of the min wage for NJ, given by: `$$\tau_{\text{min wage}, NJ} = u_{\text{min wage}, NJ} - u_{\text{no min wage}, NJ}$$`

---

# Issues

- Unfortunately, we do not have a parallel universe at our disposal

- This is called the .hi[fundamental problem of causal inference]. Put in a different way:

- We can never see the same individual (unit) when they are both treated and untreated

- So we can never _.pink[garuntee]_ all else is equal, but we will try our best.

__Q__: How can we answer this question, without a parallel universe? Let's dive in.

---

# Setup