What is monopsony, and how does it affect wages?

Now that unemployment has touched its lowest level since 1969, economists are puzzling even more over why wages haven’t been rising faster. After all, with fewer prospective workers seeking jobs, employers should be having to pay up to attract new employees and keep the ones they have. One theory about what’s going carries the name monopsony.

1. What’s a monopsony?

It’s when there are many providers of a product (including labor) but only one dominant buyer, who holds all the cards and can drive prices down. In the labor market context, it means workers have lost the bargaining power they need to push for higher pay. Monopsony power was a feature of the company towns that helped define the Industrial Revolution, since everybody served one employer. More recently, the concentration of many industries into fewer and fewer dominant players, combined with the decline of labor unions, may have tilted negotiating ability away from workers and toward corporations.

2. Why is it called that?

It shares some of the same Greek roots as the more familiar “monopoly,” which means a single dominant seller of a good or commodity.

3. Why is monopsony an issue now?

Wages, mostly. They’ve been growing relatively slowly since the economy rebounded from the 2007-2009 downturn. That’s surprising, because unemployment is now very low, while employer complaints about worker shortages are reaching a fever pitch. If there are genuinely not enough workers to go around, and employees still can’t negotiate much-higher pay (as available data suggests), competition isn’t playing out as it’s supposed to. That’s why monopsony is getting a hard look.

4. What’s the new thinking on it?

As big-box retail crushed mom-and-pop stores in the 1990s, some communities were left with one dominant retail employer, in many cases outlets of a chain like Walmart Inc. But now, some economists are exploring a broader definition of the term, saying that employers have wage-setting power not just because they dominate a market but because it’s tough for workers to change jobs. If some cocktail of imperfect information about available opportunities and outright barriers to changing jobs (like licensing) are making it harder to find and get new gigs, workers could be settling for less pay than they’d otherwise be capable of earning.

5. What evidence points to monopsony?

There’s anecdotal evidence of employer domination. This includes the abuse of non-compete agreements which bar workers from taking a job from a rival company. Originally designed to prevent key employees from walking away with proprietary information, even fast food chains have tried to restrict the movement of low-wage workers in this way. (They agreed to stop the practice.) Lawsuits have alleged that tech giants including Apple, Google, Samsung and LG have conspired to hold down wages by agreeing not to recruit each others’ employees.

6. Is any of this illegal?

As with monopolies, the U.S. Federal Trade Commission’s Bureau of Competition and the Justice Department’s antitrust division can challenge a monopsony that either office deems to be anti-competitive. Some economists are also urging the FTC also to consider potential monopsony effects when reviewing proposed mergers and acquisitions.

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