From article: Is There Monopsony Power in U.S. Labor Markets? Pedro Braga Soares, Cato. June 21, 2022.
The 2022 Economic Report of the President devotes a whole chapter to the role of monopsony, monopoly, and discrimination as barriers to economic equality.
That MONOPSONY POWER — MARKET POWER HELD BY BUYERS [OPPOSITE OF MONOPOLY POWER - MARKET POWER HELD BY SELLERS] — is given equal billing to the threat of anticompetitive conduct in product markets or prejudice in hiring is striking.
In the report, monopsony is alleged to be rampant in the labor market as employers, the buyers of labor, hold wages below competitive levels.
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Once regarded as a mere intellectual curiosity, interest in monopsony as it applies to labor has exploded among economists, policymakers, and politicians in recent years.
For a sense of this, consider just two published economics journal articles used the term in the 1980s, in the 2010s, 64 did.
Partly spurred by this recent literature, THE BIDEN ADMINISTRATION CONTENDS MONOPSONY POWER IS "UBIQUITOUS" IN U.S. LABOR MARKETS and requires corrective policy responses.
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The 2022 report advocates countering employer power by ADVOCATING STRONGER SUPPORT OF LABOR UNIONS, HIGHER MINIMUM WAGES, THE APPLICATION OF ANTITRUST LAWS TO LABOR MARKETS, and bans on noncompete agreements.
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Is monopsony power really an appropriate model of the American job market?
On inspection, many of the studies cited as evidence of this power are not convincing.
NEWER RESEARCH FINDS RELATIVELY SMALL MONOPSONY MARKDOWNS ON WAGES.
The policies advocated to correct for monopsony power often produce outcomes inconsistent with the idea these labor markets are monopsonies.
There are real risks proposed interventions will eliminate job or remuneration agreements workers value.
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Monopsonies are the flipside of monopolies.
In monopolies, there is only one seller and many buyers, in monopsonies, one buyer and many sellers.
A situation with one or few buyers and many sellers may be a good approximation of some historic labor markets, the TEXTBOOK CASE BEING A FACTORY TOWN WHERE THE FACTORY EMPLOYS MOST OF THE RESIDENT WORKERS.
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Most labor markets have more than one firm hiring workers, but many economists worry about labor markets being highly concentrated. Concentration can theoretically be a source of market power in labor markets, especially when coupled with barriers to employer entry.
But concentration and market power are not synonymous.
Market power in labor markets means employers can maximize profit by paying wages below the value generated by workers — a wage markdown.
Concentration means one or a few firms are responsible for a substantial fraction of employment.
FACTORS SUCH AS POTENTIAL COMPETITION FROM UPSTART BUSINESSES, CAN CURB EMPLOYERS' MARKET POWER EVEN IN A CONCENTRATED MARKET.
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Many think government can reduce the monopsony problem.
IF A GOVERNMENT POLICYMAKER COULD SET A MINIMUM WAGE BETWEEN THE MONOPSONISTIC AND THE COMPETITIVE WAGE RATES, THIS WOULD DELIVER A "DOUBLE DIVIDEND" OF MORE JOBS AND HIGHER PAY.
Similar logic dictates labor unions could offset monopsony power or that antitrust enforcement that reduces monopsony power could reap the double dividend.
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Several government policymakers and economists HAVE INTERPRETED THE MONOPSONY LITERATURE AS VINDICATING THEIR LONGSTANDING DIAGNOSIS OF THE U.S. ECONOMY AS SKEWED BY CORPORATE POWER against the best interests of workers.
They claim this explains a host of social problems, including inequality and gender or racial pay gaps.
This in turn purports to justify policy prescriptions such as stricter antitrust enforcement against mergers and acquisitions, raising the minimum wage, banning noncompete agreements, strengthening union power, and more.
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Our assessment, however, is the current state of evidence is much less persuasive than portrayed, which makes these proposals problematic.
Suppose, for example, there was a small-town supermarket deemed to be a monopsony employer of retail workers in the local market.
WOULD THE SMALL-TOWN SUPERMARKET BE FORCED TO SPLIT IN TWO SO THE NEWLY CREATED FIRMS WOULD COMPETE?
This could have significantly adverse consequences in product markets by introducing new inefficiencies.
How antitrust authorities would consider these tradeoffs is unclear.
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ONE-SIZE-FITS-ALL SOLUTIONS, LIKE RAISING THE MINIMUM WAGE OR NATIONWIDE STRENGTHENED LABOR UNION LAWS, WOULD CAUSE SIGNIFICANT ECONOMIC PROBLEMS in some areas and industries, even if they help alleviate monopsony power where it exists.
An increased federal minimum wage or even a hike across a whole state might successfully raises workers' wage rates at the cost of monopsony rents in some places but significantly reduce employment elsewhere.
It seems unlikely the same wage floor could perfectly correct for monopsony power in all low-pay industries across the whole country or even a whole state.
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The reality that labor markets are competitive, with free entry curbing excessive profits over time, means HEAVY-HANDED GOVERNMENT POLICIES ARE LIKELY TO REDUCE JOB DIFFERENTIATION AND FLEXIBILITY that is valued by workers.
Higher minimum wages, mandatory maternity leave, and mandatory vacations would narrow the diversity of possible job packages and reduce the welfare for some workers.
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Pay disclosure laws might make it more difficult for firms with monopsony power to wage discriminate based on value of each worker, leading to worse employment outcomes.
Banning non-compete agreements in contracts can have significant unintended consequences too, even if they do make workers more mobile.
Even if wages increase marginally in the short run, THE BAN MIGHT MAKE FIRMS REFRAIN FROM SHARING PRODUCTIVITY-ENHANCING INFORMATION OR PROVIDING ADEQUATE INVESTMENT IN WORKERS.
Indeed, evidence suggests such contracts foster risky research-and-development investments and more training in workers.
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Instead of the above interventions, POLICYMAKERS COULD HELP WORKERS BY REMOVING GOVERNMENT-IMPOSED CONSTRAINTS ON MOBILITY OR THE ABILITY TO CHANGE OCCUPATIONS.
Government occupational licensing reduces mobility across professions, increasing wage-setting power on the margin.
In a 2020 working paper, Morris Kleiner and Ming Xu suggest licensing accounts for almost 8% of the total decline in occupational mobility over the last two decades.
Zoning policies restricting businesses in certain locations or pricing workers out of moving to higher wage locations because of higher housing costs there are also likely to bolster local monopsony market power by reducing options available to workers.
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The surge of interest in market power has brought important contributions to our understanding of labor markets.
Nevertheless, the leap from existing evidence to calls to transform labor market policies is misguided.
Policymakers should avoid swift policy action based on these studies.
Large minimum wage increases, further government support for collective bargaining, and applying antitrust laws to labor markets GOVERNMENT BLANKET POWERS RISK DOING GREAT HARM.
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To the extent government policymakers are worried about monopsony they SHOULD FOCUS ON REMOVING GOVERNMENT-ERECTED BARRIERS TO WORKERS' GEOGRAPHICAL OR OCCUPATIONAL MOBILITY.
(end of article)
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“To the extent government policymakers are worried about monopsony they should focus on removing government-erected barriers to workers' geographical or occupational mobility.”
Simply, the freer the economy the more mobile businesses and employment are, the higher the wages, the lower the prices, and the better the standard of living.
The question must be “how smaller we can make government?” not “how much more protective can we make government.”
Unfortunately, about half of us feel the second question is the most relevent.
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