It is worth digressing somewhat here. In recent years there has been a concerted campaign to challenge the economic orthodoxy and suggest that labour markets are somehow different to other markets. Essentially, proponents of this view try to argue it is possible for wages and labour demand to both rise! The foundation for these ideas is the work of Card and Krueger (1995). Robson (2004) has provided a lively and convincing criticism of this view and the critique below borrows heavily on his reasoned arguments (see also, ACCI 2006; Moore 2002). The empirical findings of Card and Krueger for the United States have also been heavily criticised (see, for example, Ehrenberg 1995; Osterman 1995; Seltzer 1997).

The basis of the argument is that the labour market is characterised by monopsony, whereby some employers have monopoly power in the hiring of workers. Monopsony power is where an individual employer is able to exert control over the level of wages due to their market power. This situation can arise where there is a single employer of a certain type of labour, or where the employees are in an isolated area and only have the choice to work for a single employer. Under monopsony power a small increase in the minimum wage will result in an increase in employment. The increase in wages effectively transforms the behaviour of low-wage firms into that of high-wage firms.

In the case of a pure monopsony, a firm can reduce its wages and only lose part of its workforce. This occurs because some portion of the workers are either unable or unwilling to leave. This is not the case in a perfectly competitive labour market, where all employees would leave to maintain a higher wage. Firms under monopsony will reduce wages, because even though they are losing workers, which reduces their output and hence revenue, they have also lowered their wage bill for their remaining workers, and have hence lowered their production costs. A firm will continue to lower wages until the reduction in revenue exceeds the reduction in costs.

If the monopsony model holds, imposing a minimum wage can result in an increase in employment, under certain conditions. If a minimum wage is introduced it means that the firm will now have to pay higher wages for all its employees, increasing the wage bill. This will result in the firm expanding employment in order to increase production and, hence, revenue until the increase in revenue offsets the increase in costs.

The major problem for exponents of the above view in Australia is to explain why employers of the lowest-paid workers would have monopsony power, as there are numerous employers of low-skilled labour, and there are few impediments to these workers moving to another employer, particularly in the long term when employees can change industry and location. In a monopsony labour market you would expect to see few employers and numerous barriers to entry to new firms.

Also, if monopsony power existed, we should observe a fall in output prices as the minimum wage increases. This is because an increase in the wage will increase employment, which would expand production. For the firm to be able to sell this additional output, it would have to decrease output prices to encourage consumers to buy the extra output. All the empirical evidence shows that prices rise when minimum wages rise (ACCI 2006).

Even if there is monopsony power, the minimum wage can only rise within a certain range before it starts having a negative effect on employment, even if it initially had a positive one. Card and Krueger (1998) themselves acknowledge that if the minimum wage is raised too much, job losses will arise. The wage at which employment falls will vary across industries, making minimum wage a fairly useless economy-wide policy.