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Hyperwage
Theory
Part 20
Hyperwage Theory loves monopsony. That’s how I ended my last column and how it starts this one. Increasing wages will result in more employment. Isn’t it beautiful?
Why? In the decade since I conjured up Hyperwage it was only lately that I found an obscure theory in microeconomics that tends to support Hyperwage. In contrast, the Keynesian multiplier is a macroeconomic theory which also supports Hyperwage, and I’ll touch that later.
Will Hyperwage result in net unemployment? Based on my personal experience the First World countries which are hyperwage countries are economically successful because they give labor its true value. And yet, look at World Bank statistics, unemployment rates in hyperwage countries are very low compared to low-wage countries. Thus, using logic, argumentation and experience hyperwage does not result in unemployment but instead generates employment.
The irony is that the First World countries do not realize that hyperwage is their own weapon of success.
Then came the surprising empirical data of the Card-Kruger study. Again, the irony is that First World economists think that CK is a fluke, an outlier, and controversial. Even CK themselves do not have a theory that predicts their controversial results. Of course, if they had a theory, it wouldn’t be controversial.
On the other hand, the Street Strategist believes that the CK study is a perfectly natural effect predicted by Hyperwage Theory.
Now, finally, comes microeconomic theory to the rescue.
Monopsony
I have discussed monopsony in the previous column but probably you didn’t understand it. Don’t worry, I only heard of monopsony a few months ago.
Monopoly is market with a single seller. Oligopoly with a few sellers. Pure competition is a market with many sellers.
Monopsony is market with a single buyer. Oligopsony is market with a few buyers. Monopolistic competition is a market with many sellers of similar products but with distinguishing features. Pure competition is a market with many buyers.
We all know what monopsony or perfect competition is but have you ever heard of monopsony? I asked a few economics majors, and I tell you some of them don’t know what it is. Why? Due to time constraints in school we only discuss monopoly and to regulate it.
What makes monopsony special and why does Hyperwage loves it?
Hyperwage loves monopsony because of all the market structures, it is only monopsony as applied to labor markets that theoretically predicts a corresponding increase in employment whenever there is an increase in minimum wages. Incredible!
Here is a theory of the firm that states that in monopsony the demand for labor increases whenever there is a minimum wage increase because doing so is the optimal action of the firm.
Can you imagine that? The reason for increasing employment is not merely out of generosity but out of economic necessity.
Practically, I jumped in the air at this discovery.
Exhibit 9. Monopsony and Minimum Wage
Buying power
Due to the tremendous buying power of the monopsonist as the only employer in town, it can drive the
price of labor downwards.
To attract more workers, the monopsonist have to pay higher wages. This is signified by the labor supply curve in Exhibit 9. This is assuming there is a shortage of manpower as in the case of Hong Kong and Singapore and in the Middle East, especially the dirty lowly jobs. That is why in Singapore, the government does not set a minimum wage because their market supply of labor is capable of working under the law of supply and demand.
In overpopulated countries, labor outnumbers demand. This the time government should step in.
Again, I must warn you. I don’t want government intervention in general, but in this special case of minimum wages, I make it the crux of Hyperwage Theory: Government intervention in the minimum wage setting.
Don’t forget under monopsony without a minimum wage, the optimal profit equilibrium point of a monopsonist is when the marginal cost of labor (MCL) is equally to the Marginal Revenue Product of Labor (MRPL) of employing extra workers. This is the marginal utility concept. This is the intersection point Eq and Wq in Exhibit 9.
Monopsony and minimum wage
When the government sets the wage floor (minimum wage), the national minimum wage (NMW) becomes both the average cost of labor (ACL) and the marginal cost curve of labor (MCL).
The point of intersection of W2 (which is the NMW) and E2 is the point where the monopsonist has optimal profit (MCL = MRPL).
But wait, E2 is a point where the monopsonist hires more workers than before (Eq). What does this mean? It means that the optimal economic profitability of the firm is a point where it has to hire more workers.
More employment by economic necessity. Isn’t this wonderful?
Look at E2 in Exhibit 9. It is a point of more employment that corresponds to W2 or NMW.
(Note, this chart is better appreciated with moving slides, you can email me for a copy.)
Obscure theory
What is happening here? Hyperwage Theory is not excluded by economic principles. In fact, the more we delve into economics the more we realize that Hyperwage find new friends in the basic economics.
Monopsony theory is actually obscure theory but with the advent of Hyperwage, all students of economics will be forced to learn its special quirk.
Think back. If I asked you several weeks ago that there is a theory of the firm in microeconomics that states that increasing the minimum wage will result in more employment what you say?
For sure, you would have called me an economic ignoramus.
Now, those PhDs who disagree with me, have you ever come across this special quirk of monopsony?
Probably not, or if you did, you probably did not realize it could be used and integrated into a completely revolutionary theory.
Now that I have completed my defense of Hyperwage against the unemployment bogey, can you how see how everything falls elegantly into its own place?
Labor Market as Monopsony
Is our labor market a monopsony? In First World countries, there may be a big debate on this, but overall, I believe employers have monopsonistic features because almost always people are looking for work, not firms looking for workers. In fact, that is why there is unemployment.
In Third World countries, it is almost an incontrovertible fact that the labor market is a monoposony.
There was one hotel who advertised for a hotel front desk clerk and 3,000 applied for the position. With the very high unemployment rate sometimes ranging from 8% to 14% in the Third World, the firms as an aggregate behave in a monopsony. In countries where tens of thousands of graduates in a year, could it anything else but a monopsony?
Here’s another example that tends to support the monopsony regime. In Hong Kong, the banks recruit bank tellers with only a high school qualification, and even more than that some banks actually offer signing bonuses of HK$6,000 (US$=769 ;PhP=43,064)).
In the Philippines, even a CPA cannot land a job a teller. Indeed, an applicant will probably have to pay the P43,000 to the bank HR manager in grease money so that he will be given priority in the recruitment.
Can you imagine the quality of life for everybody when labor is given its true value?
In short, I believe that in Third World countries, the labor markets are monopsonies.
Elegance
I originally thought Hyperwage was for coffee shop retinues only. Some lively discussion about some crazy theory. Then I realized that I could address almost every negative reaction to it. That encouraged me to tell people about it.
I saw different perspectives by their questions. What will happen to the exchange rate? What will happen to export prices. What will happen to the locators in our export processing zones? Will Toyota leave the country? Will DeutscheBank abandon us? Will Nokia fly away? Will bakeries close? Will couriers go belly up? Will power generators lose money because college graduates earn P70,000 or maids P20,000?
With every answer, I realized that Hyperwage is more elegant than existing theories, more consistent that the aimless poverty strategies by our so-called experts, introduces more non-economic flow-on benefits and is a comprehensive step that benefits the entire economy?
Epiphany
Can you see the vision of the Street Strategist? I only need to change a single variable and everything else follows. No need for micro-lending, housing, and rice programs that benefit less than 2% of the population.
Exactly, what is the poverty, brain drain or anti-corruption solution of our economists? They have a hundred different unrelated solutions that never work.
The Street Strategist has a single integrated comprehensive solution.
I have read the critique of my detractors and coming from PhDs I am frustrated because I realized these experts do not even understand simple concepts such as Keynesian multipliers and the circular flow models. They know what they are but unfortunately they don’t understand how they work. It’s a pity, really. When I read their critiques, I began to appreciate how brainwashed they are, and how limited their understanding of basic economics are. At least, some of them. Funny, even my readers found out the mistakes made by the PhDs.
Or answer this: As a PhD in economics do you find it a normal state of things that domestic helpers work for 16 hours a day on P2,000 per month?
Where do we go from here? There are three basic attacks on Hyperwage namely, inflation, unemployment, and affordability. I have already addressed the first two. I will tackle the third one next.
Afterwards, I shall proceed to discuss the economic and non-economic features and benefits of Hyperwage.
Will Hyperwage result in more unemployment? If you still believe so, I’m sorry, you are beyond redemption. You must first open up your mind.
As for me, I had an epiphany. I had a vision. I saw the light. I saw the future.
I saw the future of economic history and its name is Hyperwage.
(Thads Bentulan, Sept. 22, 2005)
* * * * * ∯ * * * * *
..................................................................................................
To join the mailing list send an email to streetstrategist-subscribe@googlegroups.com
A PDF copy of the entire book on Hyperwage Theory is available currently for free.
Send an email to streetstrategist@gmail.com for the latest edition.
Want to order other books by Thads Bentulan?
The Misadventures of the Street Strategist Vol 1 to 13
..................................................................................................
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