from Nick Bunker at the Washington Center for Equitable Growth, Monopsony and market power in the labor market:
We’ve all heard the term “monopoly,” even if it’s just in the context of the board game. But a related term, or even another face of monopoly, is monopsony. A monopsony is when a firm is the sole purchaser of a good or service whereas a monopoly is when one firm is the sole producer of a good or service. Most examples of monopsony have to do with the purchase of workers’ time in the labor market, where a firm is the sole purchaser of a certain kind of labor. Just as the United States is seeing increasing evidence of monopoly power and cartelization on the producer side, we also need to pay attention to the effects of monopsony power in the labor market.
The classic example of a monopsony is a company coal town, where the coal company acts the sole employer and therefore the sole purchaser of labor in the town. Now why should we care about this? The monopsony power of the coal company allows it to set wages below the productivity of their workers. In other words, employers gain the power to depress wages.
If monopsony is a good way to understand the labor market, then what does that tell us about how public policy should deal with these kinds of hiring conditions moving forward? Perhaps there is a role for antitrust laws. Or we might consider policies that directly boost wages that counteract the power of employers, such as an increase in the minimum wage. Or, if we’re concerned about the role of outside offers, we could focus on making sure the economy is running at full employment. If the diagnosis is correct, we have quite a few medicines waiting on the shelf.
Like rent seeking, monopsony is a greater issue in a stagnant economy. A strong and growing economy with more employment opportunities creates more demand for workers. Policies which discourage mobility and flexibility among workers also reduce their flexibility in the work world. Friction costs such as selling a home, especially when the market is upside down, or having to buy health care coverage without the deduction your employer gets all serve to tilt bargaining power to employers, Tax policy which encourages home ownership over renting reduces worker mobility.
Raising the minimum wage may be the most clumsy way to counter monopsony power since it applies a rigid policy to a wide variety of businesses and assumes an understanding of the consequences that probably does not exist.