What Starbucks can teach us about the minimum wage

(This post grew from some comments I made on Greg Mankiw's post about how the EITC is superior to the minimum wage for the purpose of income redistribution. Obviously, I disagree...)

Sometimes, people trip themselves up by using a dollar word when a nickel one would do. Such is the case when the proponents for and against the minimum wage argue. Those who think that the minimum wage is bad policy usually argue, using Econ 101, that raising the price of labor must necessarily raise unemployment. This makes it awfully tempting for the defenders of the minimum wage to also reach into Econ 101 for a good riposte -- in steps "monopsony", a condition under which raising the wage can actually increase level of employment. The trouble is, the definition of "monopsony" is a buyer's monopoly. And say what you want about the labor market in the U.S. today, no company, not even Walmart, can claim to dominate to such a degree. There might be some company towns where the main employer can be said to be a monopsonist, but even then, people can still escape by moving elsewhere. No. Minimum-wage advocates who try to play the monopsony card find themselves swiftly hoisted on their own petard. I know. I've been there.

If "monopsony" is the dollar term that does not work, plain ol' "bargaining power" is the nickel term that gets the job done. You see, even when there is no monopsony, there can still be bargaining power asymmetries that prevents wages from rising with profits.

As an analogy, let's consider the Starbucks right outside Farragut West station in Washington D.C. (Yes, I am shamelessly ripping off Tim Harford's example from the excellent The Undercover Economist here.) Every morning, this Starbucks is slammed with commuters looking for their fix of caffeine. Must be making a killer profit, right? Actually, no. Despite the huge volume of sales, the exorbitant rent means that most of the profit goes into the landlord's pocket. If starbucks baulks, the landlord will simply sign a deal with Cosi, or Dunkin Donuts instead. Notice that the landlord need not have monopsony power for there to be this asymmetry -- starbucks can go to New York or Denver or anywhere to open its stores instead. But there would be no point because it would run up to the same issues there too. As long as there are more companies wanting to open stores than there are prime sites, starbucks would have no bargaining power.

What would happen if the government took pity on poor, beleagered little Starbucks (haha) and decided to cap rents at half the current rate. What would happen? Would the landlord decide not to rent to Starbucks at the lower rate out of pique? No, because half is better than nothing.

I think you can see where I'm going here.

Unskilled workers are always going to be the price-takers rather than the price makers as long as there is slack in the labor market (a condition, by the way, we actively fiddle with the interest rates to ensure.) The minimum wage is an artificial way of boosting the bargaining power of the employee, allowing them to keep a bigger slice of the profit pie they generate.

The jobs that are lost would be the ones that are not generating that much value anyhow -- the supermarket bagger, the sandwich-board wearer. For the unfortunate few who are thus affected, I suggest a social safety net of not only enough income to live on (but not more) but also further education and job-training that would enable those people to become valuable employees as opposed to near-worthless menials.

Where would this money come from? Why from the money we currently give away as the EITC, of course.