Company Town Minimum Wage at the Sawmill
A company town has 1,500 working-age adults. The only substantial employer is a sawmill, which currently employs 1,200 workers at $3.00 an hour. The mill's labour demand and the town's labour supply to the mill are estimated as follows: at $3.00, demand is 1,200 and supply is 1,200; at $3.60, demand is 1,100 and supply is 1,400; at $4.20, demand is 950 and supply is 1,600. The government proposes a minimum wage of $3.60. The mill says it would mechanise one production line and would not replace retiring workers. Workers who cannot find mill jobs may commute 90 minutes to a city where the wage is $3.20, or work in informal services for about $2.40. The union argues that the mill has monopsony power and that a minimum wage can raise both pay and employment. Local retailers expect higher wages to raise spending, but the mill sells output in a competitive national market.
1. At the proposed $3.60 minimum, calculate employment, the labour surplus and the change in the hourly wage bill. Who gains and who loses?
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At $3.60, the mill demands 1,100 workers but 1,400 are willing to work at that wage. Employment is the smaller quantity, 1,100; the labour surplus is 1,400 - 1,100 = 300 workers. Before the minimum, employment is 1,200 at $3.00, so 100 mill jobs are lost. The wage bill rises from 1,200 x $3.00 = $3,600 per hour to 1,100 x $3.60 = $3,960 per hour, an increase of $360 per hour. The 1,100 retained workers gain $0.60 each = $660 per hour. The 100 displaced workers lose $3.00 each = $300 per hour, if they had no alternative. The net gain to employed workers is $360 per hour, but it is not a Pareto improvement because the displaced group is worse off. The 300 surplus workers are not automatically employed; some may commute for $3.20 or take informal work at $2.40.
2. Does the monopsony argument justify the minimum wage? Use the schedules to support your judgement.
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The monopsony argument is that a single buyer of labour faces an upward-sloping supply curve, so it restricts employment to keep the wage down. A minimum wage set between the monopsony wage and the competitive wage can then raise both pay and employment. These figures do not support that simple story. At $3.00, demand and supply are both 1,200, so the current wage is already at the intersection of the two schedules. When the wage is raised to $3.60, demand falls to 1,100 while supply rises to 1,400. Employment falls, not rises. To justify the union's claim, the mill would need to be shown to be restricting employment below 1,200 at $3.00, with marginal factor cost above the wage and marginal revenue product above the wage. That evidence is not in the table. The mill may still have local bargaining power, but the proposed minimum is above the apparent equilibrium and therefore creates a labour surplus.
3. Compare the minimum wage with a wage subsidy or a training grant. Which is more likely to improve distribution without causing displacement?
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A wage subsidy to the mill would lower its effective cost per worker and could preserve or increase employment, but it transfers cost to taxpayers and may subsidise a low-wage employer. A training grant could raise productivity and shift labour demand outward, improving both pay and employment if the skills are useful. A minimum wage redistributes to those who keep jobs but risks displacing the least productive workers and accelerating mechanisation. Because the mill sells in a competitive national market, it cannot easily pass higher wages into output prices; it will adjust employment or investment instead. A better package might combine a modest minimum with a targeted wage subsidy or training, plus help for displaced workers to commute or retrain. The distributional judgement is not just about the average wage; it is about who bears the adjustment.