3
As suggested above, the implications of
monopsonistic wage-setting extend beyond the
redistribution of wages to profits. First, it can lead to
inefficient reductions in employment and output,
where some workers who would have been willing
to work at the competitive market wage are never
hired, and the output they would have produced is
produced less efficiently by other firms if at all.
Notably, firms are willing to incur this reduction in
employment only if it allows them to pay lower
wages or to reduce costs through inferior benefits or
work conditions. An important implication is that
monopsonistic employers can be induced to hire
more labor if their ability to set wages below the
level in a competitive market is constrained—for
example, by a collective bargaining agreement or a
minimum wage.
A second implication of monopsony is a weakened
link between labor productivity and wages. Because
firms no longer compete aggressively for workers,
monopsony power opens up the possibility that
wages can differ—both between and within firms—
even among workers with similar skills. Recent
evidence suggests that much of the rise in earnings
inequality represents an increase in the divergence
of earnings between workers in different firms
(Barth et al. 2016; Song et al. 2015). As Furman and
Orszag (2015) have argued, this trend, and the
concurrent rising dispersion of firm-level returns, are
consistent with the notion that firms have wage-
setting power. A similar conclusion is reached by
Card et al. (2016) who also show that when
competition between firms for labor is limited, then
the wages of similarly-skilled workers may become
tied to the productivity of their employers: while all
firms have an incentive to restrict employment and
depress wages below their competitive levels, more
productive firms (with better technology, for
example) will choose to hire more labor—and will
pay higher wages to do so.
Further, if employers with monopsony power are
able to differentiate among workers’ reservation
wages, then they can also set wages that
discriminate among their own employees.
In the
extreme case of “perfect” wage discrimination, firms
For evidence that employee preferences for internal
equity can constrain firms’ wage-setting power, see Breza,
can pay each worker the minimum he or she is willing
to accept, regardless of the worker’s skills or
productivity. More generally, differing degrees of
worker bargaining power across different groups of
workers—for example by age, race or gender—may
lead to varying degrees of wage depression,
promoting within-firm wage inequality. For example,
if women’s job mobility is more constrained than
men’s by family responsibilities, then women will be
more limited in their choice of employers and be
more vulnerable to wage discrimination (Manning
2003, Ch. 7).
To be sure, firms face a number of constraints in their
ability to pay different wages to similarly qualified
workers (or even to workers who perform different
tasks), including legal constraints and concerns over
internal equity or fairness.
However, employers
may be less constrained by equity concerns when
workers lack good information about the wages of
their coworkers (Card et al. 2012). Firms can also
circumvent internal equity constraints or fairness
norms by shedding activities to subordinate
companies through subcontracting, third party
management, and other organizational forms. Such
“fissuring” of employment makes wage
discrimination feasible by transforming wage setting
within the walls of a business to a pricing problem
among subordinate firms (Weil 2014).
Sources of Monopsony Power in the Labor
Market
In the strictest sense, monopsony arises when there
is a single employer in a market; textbooks often cite
isolated “company towns” in the late 19th and early
20th centuries as classic examples. Because such
company towns are rare today, the concept of
monopsony might appear to have few applications.
On the other hand, however, the conditions of
“perfect competition” that require firms to take the
wage as given are also, arguably, quite rare. A
perfectly competitive labor market requires that
workers stand ready and able to change employers
in response to even slight differences in wages or
working conditions.
Kaur, and Shamdasani (2016); Dube, Giuliano and Leonard
(2015); Card et al. (2012).