The contemporary economic landscape is witnessing a profound resurgence of interest in the intricate concept of monopsony, particularly within labor markets. This resurgence is spurred by escalating levels of inequality and the diminishing share of national income allocated to labor. The growing imbalance of economic power between employers and workers has become a focal point, with monopsony as an invaluable theoretical framework to understand this power asymmetry comprehensively. A long-held belief persists that employers wield disproportionate market power over their employees. One model for this power imbalance was proposed by Robinson (1933) in the form of monopsony. However, there has been a recent uptick in interest in monopsony, and this short research paper gives a quirky overview of the evolution of the economic literature on labor market monopsony. At the heart of the monopsony concept is that individual employers do not confront an infinitely elastic labor supply curve. Unlike the assumptions of a perfectly competitive model, where a wage cut leads to an immediate loss of workers to competitors, monopsonistic employers can decrease wages without witnessing a mass exodus of their entire workforce. This phenomenon has garnered increased prominence with the rise of market power held by dominant firms, influencing both the overall economy and the labor market.
One method for assessing the importance of monopsony is to directly calculate the pay elasticity of the labor supply curve for specific enterprises. The metric, known as “potential monopsony power,” offers a straightforward method for evaluating the significance of monopsonistic circumstances. The previous study by Staiger, Spetz, and Phibbs (2010) investigated plausibly exogenous fluctuations in earnings within the public sector. Caldwell and Oehlsen (2019) conducted research whereby they offered empirical evidence on the effects of randomly assigned increased compensation for one week on the labor supply of Uber drivers. The study examined both the intense and extensive margins of labor supply. Despite discovering a response, it is intriguing that none of the elasticities exceeded 1. This finding is perplexing, given individuals’ considerable autonomy in determining their work hours and the prevalence of various job engagements. Where drivers for Uber and Lyft are free to choose between the two services, the elasticity is higher, but the level of potential monopsony power is still high. In the realm of employer monopsony power modeling, two predominant approaches can be identified: the “modern” monopsony framework, which centers on labor market frictions, and the “new classical” monopsony framework, which focuses on the scarcity of labor resulting from variations in worker preferences. There is a potential method for integrating both models.
One potential approach to elucidate the significance of monopsony is examining the repercussions resulting from an external alteration in the quantity of labor supplied to a firm, especially a change in labor supply while maintaining a constant salary. The transition would not lead to substantial differences in employer outcomes in a labor market characterized by perfect competition. This is because employers possess unrestricted access to an abundant pool of homogeneous workers, enabling them to hire suitable replacements readily. In contrast, a monopsonistic labor market would entail inevitable repercussions. A decrease in the labor supply would result in reduced employment levels and, given the diminishing marginal productivity of labor, an increase in wages. In a study by Isen (2016), the author examined the consequences of unforeseen worker fatalities. The study’s results revealed that the decrease in revenue surpassed the concurrent wage reduction, suggesting that the wages paid were higher than the marginal product. In contrast, Jäger and Heining (2019) made an observation indicating that there was an increase in salaries and retention rates among the remaining workers. This observation suggests a potential alteration in the labor supply curve specific to the employer.
Monopsony is based on the premise that labor supply curves are not infinitely elastic for individual employers. This means that contrary to the perfectly competitive model, a one-cent wage cut will not immediately cause an employer to lose all its current employees to competitors. The impact of increased market power among dominant firms has been examined by researchers, who have identified its effects on the economy and the labor market (Bassier et al., 2022). These effects include a reduction in the rate of new business startups and a decrease in overall company dynamism. Additionally, the labor market experiences a decline in labor share and the stagnation of wages as a result of this phenomenon. The influence of dominant firms on stipends can be observed through two distinct mechanisms: monopoly power in the goods market and monopoly power in the labor market. When there isn’t enough competition from other companies offering jobs to workers, dominant firms can use their monopsony power to pay their employees less than they’re worth. Monopoly power in the goods market is flipped here. Captive workers have limited agency because of barriers to movement across industries and regions.
Consequently, the labor supply function would be flat in an uncompetitive labor market, but for a dominant firm, it is upward-sloping. Firms use their market power to their advantage by paying workers less than their marginal revenue product (the markdown) when they recruit new employees. Wages fall as a result of more monopsony power.
Goods market power also hurts wages, even in a perfectly competitive labor market. If sufficient firms exercise monopoly power in the goods market, wages will also be affected by the general equilibrium effect. A firm with a stronghold on its market can charge higher prices than it costs, a practice known as markup. When prices go up, fewer people are willing to buy, which means fewer goods are made. Wages are unaffected by this since firms have market power in their small, specifically defined markets, which are tiny compared to the whole economy. Nevertheless, wages are affected when there is a general rise in market power across numerous goods markets. Salary cuts affect all workers, not just those at price-gouging companies, because falling labor demand results from the overall economic downturn.
Concerns about growing inequality, declining labor participation, and an unspoken belief that businesses now hold a stronger position in the labor market are probable drivers of the upsurge in interest in monopsony. The existence of monopsony power does not rule out its ability to shed light on trends and patterns in wage inequality. This research has already established that monopsony makes firm-level demand shocks have a more significant effect on wages; consequently, under monopsony, firm heterogeneity is more strongly transmitted to wage inequality. While Card, Heining, and Kline (2013) postulated that increasing firm heterogeneity largely accounts for the widening income gap in West Germany, Song et al. (2019) contended that a comparable widening in the US is due to a surge in high-wage workers being employed by high-wage firms. If specific labor markets are more monopsonistic than others, then monopsony could explain inequality. Joan Robinson first used the term “monopsony” in 1933 to describe the wage difference between men and women. According to a review of the research by Manning (2011), women have a lower quit elasticity than men. This could be because women are more constrained in the types of jobs they can take on due to domestic duties, which gives employers more power in the market. Following this, Webber (2016) revealed comparable results for US data; however, she also discovered that this is mainly because women tend to work for companies with lower labor supply elasticities. The gender wage gap, as observed in the meta-study conducted by Sokolova and Sorensen (2020), can only be partially accounted for by differences in size. Their findings indicate that women tend to have a lower average estimated separation elasticity than men. Card et al. (2016) found that the pass-through effect exhibited a lesser magnitude among women in Portugal than among men. Caldwell and Oehlsen (2018) conducted a study on Uber drivers and found that, in contrast to prior research, there exists a more excellent responsiveness of women’s labor supply to fluctuations in wages compared to men. Nevertheless, it is essential to acknowledge that this study is focused on analyzing a specific and separate labor market.
The phenomenon of agglomeration, as discussed by Manning (2011), along with other characteristics of economic geography, can be elucidated by the notion that labor markets with higher population density tend to exhibit greater competitiveness. This concept bears substantial implications for spatial disparities, as Manning (2011) underscored. To back up their claim, Hirsch, Jahn, Manning, and Oberfichtner (2019) presented more evidence. In a broader sense, Webber (2015) discovered that lower-wage labor markets had more monopsony power, which means that wage inequality would be worse than marginal product inequality. Inequality may increase, and growing monopsony power could contribute to that. Labor markets may have grown less dynamic or more concentrated, leading to a decline in labor market competitiveness.
Conversely, there has been a potential rise in anti-competitive behaviors. At the same time, the decline of institutions that previously safeguarded against monopsony power abuse, such as labor unions and minimum wage regulations, may have contributed to the escalation of monopsony power. Individuals at the lower end of the wage distribution benefit from a certain degree of safeguarding due to minimum wage regulations, whereas those positioned in the middle are more inclined to possess the protection afforded by labor unions. Due to the disparity between wages and marginal products, monopoly also suggests that labor contributes less to the national income. According to Naidu et al. (2018), monopsony power substantially impacts labor share by 22%. A rise in monopsony power might contribute to many countries’ declining labor share. Once more, this could be a potential focus of future studies.
Without a doubt, monopsony power plays a significant role in labor markets. Antitrust laws are starting to take employers’ market power into account. Even though many economists believe that labor markets are nearly perfectly competitive, a new issue may be the exact reverse: many studies have estimated levels of monopsony power that are so high that they make one wonder how these levels of power can be explained by the observed profits. While certain aspects of the utility of monopsony have been extensively studied, such as its impact on the minimum wage and the gender pay gap, there are other areas, such as immigration, earnings modeling with employer influence, the relationship with increasing wage inequality, and the declining labor share, that are currently being explored in their nascent stages of research. The extent of scholarly inquiry into the concept of monopsony is expected to continue to be a fundamental component of labor economics.
Bassier, I., Dube, A., & Naidu, S. (2022). Monopsony in movers: The elasticity of labor supply to firm wage policies. Journal of Human Resources, 57(S), S50-s86.
Caldwell Sydnee, Oehlsen Emily. 2018. Monopsony and the gender wage gap: Experimental evidence from the gig economy. Accessed at https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=2ahUKEwjm46H83czoAhXBsHEKHUmKDKkQFjAAegQIAxAB&url=https%3A%2F%2Fsydneec.github.io%2FWebsite%2FCaldwell_Oehlsen.pdf&usg=AOvVaw3G7ki3moyCR74lMigZRbnN.
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