A reader asked me to comment on the issue, raised by the President’s economist Jason Furman, that labor markets are monopsonistic. I do not have much to add to other blogosphere comments, but here goes:
1. Just to clarify, a monopsonist in the labor market is an employer who can set wages below a competitive rate, because its workers have no other potential employers.
2. Suppose that we accept as true the finding by Richard Freeman that the highest wages are paid at the most profitable firms. If there is a monopsony story there, I do not see how to tell it. A monopsonist would exploit its workers by paying low wages, so I would expect that if monopsony were prevalent then we would see the highest wages paid to the least profitable firms (the ones who are competitive in the labor market and cannot exploit their workers). I think that to account for Freeman’s results, you either have to say that the most profitable firms have monopoly power in the markets for their output, and they share some of the rents with their workers, or you have to be like me and be skeptical of Freeman’s ability to measure the true productivity of various workers.
3. If you have some government policy to force employers to pay higher wages, this only helps increase labor’s share if the demand for labor is inelastic. Even if firms have monopsony power, that does not necessarily make their labor demand inelastic.
4. One way for government to make workers better off would be to decouple health insurance from employment, while replacing Obamacare.
5. Another way for government to make workers better off would be to reduce the payroll tax and cut spending by a corresponding amount.
Yes, it would be more they have a franchise (something less than a monopoly) on a business and pass along some of the profits to their employees but don’t expand as much or employ as many as they could so they can maintain higher profit margins.
Thank you.
A minimum wage policy to force employers to pay higher wages will — in today’a actual conditions — lead to lower paid getting MORE money from higher paid workers. If lower paid were suffering more from the effects of monopsony than higher paid then that shift in income share is what we want.
A reasonable minimum wage raise ($15 — it was $11 when per cap income half today’s) MAY cause job loss at higher wage firms because money they used to get from consumers now goes to lower wage firms. The first payday: if lower wage employees spend their new gains in the very same higher wage businesses, then, the overall effect will be fewer lower wage employees enjoying higher end purchasing. More likely (much more I think) the lower wage will spend proportionately more of their new gains at lower way firms — leading the effect that Card and Krueger picked up in their seminal study.
Some formerly higher paid workers will either lower their wage demands or move to lower wage occupations.
What government should do is protect organizing of collective bargaining units — and let the truly free labor market sort this all out.
“you either have to say that the most profitable firms have monopoly power in the markets for their output, and they share some of the rents with their workers”
What’s wrong with this suggestion?
Perhaps most firms compete primarily on price/margin. In a competitive market, the firm with the lowest margin drives the others out of business, or pushes them to come close to the same margin. This effectively means that workers have no real alternatives. However, the firm cannot raise its margin, or new competitors will spring up and push it out of business.
Thus to be very profitable, the firm must have some unique element that cannot be replicated, and thus attain some semblance of monopoly power.
Even allowing for the possibility that monopsony plays a role in limiting wages (and that is a debatable point), such a phenomenon would be of distant secondary importance to increasing wages by improving labor productivity. Better that we spend our time, effort and treasure increasing productivity through more efficient investment in human capital (e.g. education and vocational training), physical capital (e.g. infrastructure) and institutional capital (e.g., streamlining regulations, more efficient tax rules that avoid skewing incentives).
A few weeks ago, I listened to the Econtalk with James Bessen on Learning by Doing. In that podcast, Bessen describes the situation in textile mills in the early 19th century. The mills were equipment specific, hired the unskilled and trained them how they wanted. What was interesting was that they had a sort of monopsony power as the skills were transferable and the mills preferred to hire the unskilled rather than retrain someone who had experience on other machines.
But even with this monopsony, the machines standardized over time, workers gained the power of competition, etc. But why would the mill owners move to standardized machines and give up the power to keep wages down?
http://www.econtalk.org/archives/2016/05/james_bessen_on.html
“At least at first. They were skills that couldn’t be taught in the classroom. And many of them were very unstandardized. You would go to one mill and would do things one way and would have one set of equipment–very often the looms were custom-built for the mills. It was very different from what was in other mills. So that skills learned in one mill weren’t necessarily portable to another. You didn’t have a labor market developing where workers who were trained at one mill could work at another mill proficiently. What happened after the Civil War was that standardization started taking place: That the mills coordinated their machinery; they coordinated the way that they hired workforce and used the machinery. There were training school developed for mill managers. So there was much more uniformity. And what you see happening is that robust labor market developed. That, in the 1830s, very few of the new hires had any prior experience. By the 1880s, almost all of the new hires had previous experience. What that labor market did, was it meant that mills would bid up the wages. “
Arnold Kling: A monopsonist in the labor market is an employer who can set wages below a competitive rate, because its workers have no other potential employers.
This puzzles me. What is the “competitive rate” for hiring someone other than the rate at which someone is actually hired?
Supply/demand curves are nice for teaching economics. In reality, those curves are not known. Prices and wages come about through trial and error discovery. A business only knows what wages to offer by testing the market, clearly wanting to pay less if possible. A business only knows what prices to charge in the same way, wanting to receive more if possible. What is the “competitive rate” other than the one discovered?
Say the average salary for an accountant in 2014 for River City was $60K. In 2015, more accounting graduates appeared, and a good accountant became available at $57K. The wage fell because more accountants were chasing the same number of jobs. Did all of the relevant businesses become monopsonists merely because they were the ones offering jobs in accounting? The available accountants had no other potential employers in accounting.
Or, a general decline in sales put 5% of River City businesses out of business. Their accountants, and managers with accounting experience, all became available. The same effect would happen, the average wage for accountants would fall. Where is the monopsony?
By the way. When wages do not fall fast enough in some professions according to economists, the economists complain loudly that the economy needs adjustment to provide full employment. When wages do fall, then they complain about monopsony, and want higher wages. They are always complaining.