Agent-based modelling of monopsony and the minimum wage

Abstract

A simple supply and demand argument apparently shows that minimum wage policy, ironically, hurts the workers it is ostensibly aimed at helping, by increasing their chances of unemployment. Stigler (1946) claims that economists should be “outspoken, and singularly agreed” on the issue. While the profession happily achieves the former, they are a long way from the latter (Klein & Dompe 2007). Early last century, SidneyWebb (1912) claimed that minimum wage laws had increased productivity growth, both by drawing employers attention away from cost-cutting and towards productivity improvements, and by providing a relative advantage to high-wage firms. Today, this is backed up by mathematical models (e.g. Cahuc & Michel 1996, Acemoglu 2001). Recent studies — the “new economics” of the minimum wage — have provided more ambiguous evidence about employment effects. Monopsony models have become fashionable since they were used to account for increases in employment in Card & Krueger’s (1995a) Myth and Measurement. Although the word “monopsony” initially referred to markets with a single buyer, the modern usage refers to models where individual buyers face upward sloping supply curves. Despite the shift in meaning, the term still carries some stigma, especially if it is used in contexts where the assumption of one buyer would not be credible (Boal & Ransom 1997). This project investigates whether a simple agent-based model is better described by a competitive model or by a monopsony model, and what implications this has for minimum wage policy. Two models were built. The first is a toy model which simply reproduces a competitive model in simulation form. The second, based on search models of labour markets, exhibits behaviour similar to a monopsony model. [extract from Introduction]