Minimum wage is necessary to maintain free market economy (Monopsony)

When someone claims for imposing minimum wage, many may still tend to call this person a socialist. However, imposing minimum wage seems to be less socialistic than allowing politicised trade unions (labour unions) to hold their wage bargaining power. In order to preserve capitalist model based on free market market economy requires the reasonable level of regulation in order to sustain the fair rule of market competition, stable risk management of investment (attracting investment), symmetric information (mitigating information bias), and motivation of both employers and employees participating economy without being feared of mismatch (Rationally forming their contact with each other). Minimum wage can be considered as a form of regulation, and it provides a reason to say there is no need for a trade union intervening for avoiding exploitation of labourers.

Nowadays, involuntary unemployment and stagnating aggregate demand are still the significant socioeconomic problem. The root cause of the current economic structure seems to be the shrinking market competition due to growing power of major corporations. Unlike the earlier stage of capitalism, the current capitalistic model is more centralised and specialised in the hand of minority elite corporate executives and public bureaucrats working for the favour of these corporate elites. The market has become less competitive and less free due to this phenomenon, and the market is becoming less liquid than it used to be. Under this circumstance, it reduces the liberal wage/income bargaining of majority individuals owing to this asymmetric power balance.

In the free competitive market, the demand and the supply are more likely to meet at the equilibrium point, and the error from this equilibrium point is corrected by converging the price and the quantity to the equilibrium point. By contrast, due to the asymmetric balance of power mentioned in the aforementioned paragraphs, it is now diverging from the equilibrium point as the market becomes less competitive and the freedom of entering market is suppressed.




This graph shows how monopsony (Buyer holds power over seller). The labour market of the current capitalist economy is in this situation where the labourers (Selling their labour in the market) hold less power over their wage bargaining power whilst the employers (Buying the labour resource in the market) hold excess power.

The demand for labour can be also described as the average revenue from employing labour, and the average labour supply can be the average cost for employers for employing labour. The equilibrium point (Demand meets supply) is where the average revenue becomes equal to the average cost in the labour market. Then, the wage is set at both employers and employees (labourers) agree at the market competitive level, and the labour is employed where involuntary unemployment is reduced.

On the other hand, the most desirable point for the employer is not the equilibrium point because it does not maximise their profit for their business. Their desiring point is the level of the labour employed where the marginal revenue of hiring labour meets the marginal cost of hiring labour. At this point, employers use their influential power over the market to set the wage (their cost) lower than the equilibrium point so that they can maximise their profit. Only the labourers who are still willing to participate by using their labour in the market can be employed.

This situation pretty much explains why some labourers work way too long hours with unsatisfactory wage whereas there are many citizens unhappy to be employed. These unemployed citizens tend to be blamed for not willing to keep applying for a job. But, this is fault of not only them but also the market situation not able to afford the wage motivating them to work. In addition, already employed citizens suffer from the income shortage for propping up their cultural standard of living and for compensating their exhaustion from working.

The depreciated wage level caused by monopsony in the labour market induces the stagnation of the aggregate demand which represses the market multiplier, and this leads to the economic downturn. The aggregate supply level also eventually falls because the revenue from providing the supply declines due to the falling demand. Therefore, this monopsony has to be discouraged not only for majority citizens being employed in the labour market but also the capitalist citizens employing labourers. Some of these capitalist citizens will also start suffering from declining their activities.




Imposing minimum wage may overcome this situation of monopsony by raising the wage standard to the market equilibrium point. This will reduce the involuntary unemployment as well as stimulate the market multiplier. Reduced involuntary unemployment reduces the cost for public spending. It also increases the income of already employed citizens and reduces their frustration, and then this reduces the risk of suffering from mental disease so this also reduces the public spending cost. It will increase the aggregate demand induced by increasing the income level of majority citizens.

The typical counter-argument against minimum wage is that it sets the wage higher than the equilibrium point so it decreases the labour demand. However, the fundamental problem of the current situation is that wage is set at the considerably low enough to increase unemployment and repress the market multiplier.

At the same time, employers cannot be blamed for this situation because of the following reason. The current market economy is based on the specialisation in the global level and it requires the huge economic scale of production, and the model based on the competition among traditional small-medium sized enterprises is already an old fashioned way not able to survive in this current economic model. Therefore, it is inevitable that more selected numbers of corporations with stable fiscal situation and abundant experience, productivity, and net working survive to thrive whereas traditional small-medium sized firms suffer from their staggering business performance.

Instead of cracking down against these major corporations to revive the good old competitive market based on traditional small-medium sized firms, simply imposing the minimum wage is easier and more productive. The government intervention of reducing the power of major corporations will be costly, and will slow down the economy by sacrificing all the wisdom and virtues of major corporations. Therefore, it would be better to allow the current capitalist economic model to grow while reforming it for some optimisation.

This policy will improve the corporate structure of already existing firms. Successful corporations with good managements have enough revenue to cover the cost for minimum wage as long as it is set at the market equilibrium balancing the happiness of employers and labourers. This is also an effective tool to expel ethically misbehaving corporations which usually suffer from bad management with unstable fiscal situation. Then, unnecessary exploitation will be prevented.

This policy will also encourage work sharing among citizens. In the current economy, there are citizens working for excessively long hours. When this policy is implemented, works will be shared among more individuals, and their work and life balance will be optimised. Furthermore, it will encourage to replace some tasks relying on cheap labour with newly invented technologies such as automation by artificial intelligence (AI). There are still many firms hesitate to introduce the new technology optimising their business performances because clinging to relying on their cheap labour is still economical in the short run. All in all, this will be an opportunity to accelerate the innovation.


Having considered about monopsony in labour market, imposing reasonably high minimum wage bring aforementioned benefits. It is still questionable whether it can be ideally adjusted to the equilibrium point or it exceeds more than the equilibrium point. Nevertheless, this policy still seems to be worth off to try to implement in order to tackle with reducing involuntary unemployment and stimulating the market multiplier with relatively lower cost than the other government intervention.