Monopsony and Minimum Wages: Evidence from the Tobacco Leaf-Processing Industry

Abstract

This paper uses evidence compiled by the Bureau of Labor Statistics and the Tobacco Industry Committee to examine the impact of the initial implementation of the Fair Labor Standards Act. It is shown that the minimum wage was heavily binding, but employment in a BLS sample of Virginia and North Carolina firms actually increased following its passage. This employment increase can not be explained by traditional models but is consistent with the monopsony model. Finally, it is shown that the industry met two important assumptions of the model: workers could not easily relocate to alternative employment and wages were less than marginal revenue product.