John Cochrane thinks we liberals who think higher minimum wages can do some good by offsetting monopsony power fail to grasp labor economics. He is citing some work by Jeffrey Clemens, Lisa B. Kahn, and Jonathan Meer. Alas his blog post screwed up the link to this interesting paper:
Compensation consists of a combination of cash and non-cash attributes, and depends on worker productivity. We also allow for the possibility of a bargaining wedge whereby the firm pays less in total compensation (cash and non-cash benefits) than a worker’s marginal product. When the minimum wage rises above the prevailing wage (cash payment) but below a worker’s marginal product, the firm will shift the mix of compensation towards cash and away from non-cash benefits, but will still find it worthwhile to employ the worker. This distortion can create losses to worker welfare which, if large enough, will push workers to prefer their outside option of nonwork. We also show that, in the presence of a bargaining wedge, the welfare effects of minimum wage increases are non-monotonic. In general, wage gains associated with increases in worker bargaining power will tend to improve welfare, while wage gains that are accommodated through reductions in non-cash benefits can reduce welfare.
In many ways, this dates to a 1980 paper by Walter Wessels (“The effect of minimum wages in the presence of fringe benefits: An expanded model,” Economic Inquiry), which the authors cite. Wessels assumed a perfectly competitive model where government interference lowered worker total compensation. Wessels published later papers, which alas the authors did not cite. In 1994, the Journal of Labor Research presented an extension of Wessels thinking that incorporated monopsony power entitled “Minimum wages and the wessels effect in a monopsony model” by J. Harold McClure: