There's been a trend in recent years of a thinning employer market in low-wage sectors. Walmart being the largest employer in the US for example, and the collapse of mom and pop businesses. This has led to reduced competition from low cost labor buyers, effectively allowing a few companies to set prices.
With recent events this has created substantial shocks in this market sector and we've seen wages becoming stickier at higher price levels. Presumably this could be because fair market forces are at play, allowing labor sellers to better consider the cost/benefit of their labor.
To what degree do you think this is true?
I know a monopsony is only 1 buyer and many sellers, but can’t fast food, call centers, and other similar low paying jobs be viewed as monopsonies? Prior to the great resignation, low skilled laborers had no choice but to accept the going wage for their position because they needed a job. The great resignation helped because people were able to save more and be comfortable with the extra money. This was not possible before.
So if laborers were price takers, and firms set the wages, wouldn’t they be a monopsony?
Introductory paragraph for those that aren't already aware, monopsony is the flipside of monopoly. A monopoly is a single seller while a monopsony is a single buyer. In the labor market, firms are the buyers of the labor that workers sell. Aside from restricted cases, there are no literal monopsonies. What we're really interested in is if there is concentrated power on one side in the form of some price setting power as opposed to price taking predicted by perfect competitive market conditions. We could call the ability to price set wages on the part of firms "monopsony power."
If you believe in monopsony power, you can justify a range of labor policies as being economically efficient, such that minimum wage laws and collective bargaining wouldn't lead to unemployment. So whether or not it exists feels very important to establish. Failing to establish labor market monopsony means conceding that strong labor policy sacrifices employment for some people (though it's a bullet you could perhaps make a case for biting.)
A counter I've heard is that low skilled laborers actually have a lot of firms available to them to work for. Going from a low skilled job to a completely different low skilled job, let's say from being a construction worker to being a retail worker, doesn't have high transition costs compared to say switching from being a chemical engineer to being a computer programer. Therefore low wage, low skilled workers ought to be experiencing less monopsony power than high skilled workers.
The good counter counter I've heard is job search frictions are what really causes monopsony power for most low skilled workers. Perfectly competitive labor economic theory predicts that any firm that attempts to set wages would lose all of its workers immediately. I'm sure there would be an increase in turnover, but a firm probably wouldn't lose literally all its potential workers. Partially because people don't perfectly monitor their other options, partially because of a prospect theory type thing where people are more likely to act to avoid loses than to gain, and partially because changing jobs is stressful, involves considerable cognitive effort and possibly even moving to really maximize income. That might give employers some leeway in being able to price set.
What are your thoughts though? Does it exist? Why does it exist? Can we point to good empirical evidence that it exists?
Like Walmart technically is the only retail store and employer in some small towns so could they be essentially considered both a monopsony and monopoly?
I'm asking this purely out of curiosity but are there any known solutions to a labor market monopsony that aren't Labor Unions and Minimum Wage? (I also don't mean to imply that unions and MW is a perfect solution for labor market monopsonies.)
I would love some sources to read on this.
So I'm generally an anti minimum wage guy. I like the free market deciding prices of all goods and services as opposed to the government or collective bargaining/collusion such as unions or companies colluding to raise price. However in certain cases their tends to be a monopsony in the labor market in a giver area. I'm totally against a federal minimum wage or even a state minimum wage but if in a specific city or county there exists a large employer that is the main place residents expect to find jobs and there isn't much competition from the buyers of labor(other employers) than what happens is a monopsony where the employer has leverage over the workers and is able to lower price. Since tends to force him to accept lower than needed applicants for the job and they end up hiring lower workers due to the lower supply of labor at the below market rate price of labor. So basically what you have is artificially lower wages+lower employment. No for me as someone who is a utilitarian libertarian as opposed to a moral libertarian(meaning to believe in libertarian principles solely on the basis morality), or at least I support libertarianism mainly for the utilitarian purpose and secondarily is the moral purpose, than I would tend to side with the minimum wage, decided only by local governments with the help of economists, as these local governments would understand their community fairly well as opposed to for example the state. So basically they would set a reasonable minimum wage that would be somewhere close to what the equilibrium would be(the real market rate for labor) if it were a completely competitive market. Because actually in cases of monopsonies rather than unemployment going up, the unemployment would actually decrease due to the fact that more people would be applying for jobs with the monopsonistic employer, and originally due to lower labor rate the employer would have been having a hard time employing workers. So basically unemployment would actually decrease and obviously the wages would be higher. So basically... The question would be, would you support a reasonable minimum wage in a monopsonistic market? If you're goal is the greater good I think it shouldn't be considered a bad idea.
I'm not really involved with economics academically, but I'm interested in politics and have come across various explanations for why labor's share of income has been declining over the past few decades. One explanation is that increasing market concentration provides firms with monopsony power over workers' wages. This explanation is supported by a paper authored by the Roosevelt Institute. https://rooseveltinstitute.org/2017/12/18/how-widespread-is-labor-monopsony-some-new-results-suggest-its-pervasive/.
However, a separate paper authored by the Federal Reserve Bank of Richmond and Princeton University found that, while market concentration has increased nationally, concentration has decreased locally. https://www.nber.org/system/files/working_papers/w25066/w25066.pdf. If local concentration was decreasing, wouldn't that mean there is less monopsony power? (because most of the time workers are searching for jobs within the local area)
I'm just confused how to reconcile the findings of the 2 studies, especially because I'm not a trained economist, and I'd like some feedback from individuals who have a stronger understanding of the methodology used to obtain the conclusions of the studies.
I’ve been reading up on minimum wage increases, and how the impacts differ in competitive vs. monopsony labour markets. But one thing I can’t seem to wrap my head around is the idea that in a monopsony every additional unit of labour increases the marginal cost of labour, because the firm increases the wages of all workers. But why does the firm have to increase the wages of all workers? I can’t seem to understand why this assumption (is it an assumption?) is made or why it would be a reasonable one to make.
Look forward to any help in trying to figure this out.
Some interesting words -
- flibbertigibbet: an overly talkative person; a prattler, a tonguewagger.
- apophasis: The raising of an issue by claiming not to mention it (as in "we won't discuss his past crimes").
- acedia: Acedia is a state of listlessness or torpor, of not caring or not being concerned with one's position or condition in the world. It can lead to a state of being unable to perform one's duties in life.
- droog: A violent young gang member or a hooligan.
- monopsony: the market condition that exists when there is one buyer.
These words are taken from vocabulary app - Vocab Assistant
Under the Framework of Modern monetary theory the main limit on certain types of government spending is inflation.
Does this limit apply in markets where the government is the main buyer of goods.
it may not apply if the government is the primary customer and therefore the amount and prices of goods it buys don't directly effect consumer and business prices so the effect on inflation is minimal.
it may apply if the government is competing with private industry for inputs(skilled labor, Rare materials, etc) therefor it would cause inflation.
Words you might not have heard of -
- monopsony: the market condition that exists when there is one buyer.
- persiflage: Frivolous, lighthearted discussion of a topic; Good-natured banter.
- ephemeron: something designed to be useful or important for only a short time, (E.g. a ticket, catalogue, postcard...etc.).
- beey: Reminiscent of or containing bees.
- thanatosis: The act of feigning death.
These words are taken from vocabulary app - Vocab Assistant
This paper estimates the long-run impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18 and using monthly payroll records for the Danish population. We show theoretically how the discontinuity in the minimum wage may be exploited to estimate the casual effect of a change in the minimum wage of youth on their employment. On average, the hourly wage rate jumps up by 40 percent when individuals turn eighteen years old. Employment (extensive margin) falls by 33 percent and total labor input (extensive and intensive margin) decreases by around 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old. We estimate that the relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is about -0.8.
Here is the paper by Claus Thustrup Kreiner, Daniel Reck, and Peer Ebbesen Skov. For Mississippi it might be worse.
I’ll suggest a general methodological approach here. I think that for Mississippi the chances for this kind of outcome are at least 0.8. Maybe for many of the richer states it would be 0.4? Based on those probabilities, I don’t want to do it, even if you think it is “more likely” that in most areas a higher minimum wage won’t destroy many jobs. What probabilities would be offered by those who defend a minimum wage hike?
Via Bob B.
The post Danish minimum wage data (it ain’t monopsony) appeared first on Marginal REVOLUTION.
I know that the monopsony graph shows that, since the firms can't discriminate with its wages when it wants to hire more people, its labor marginal cost curve goes up higher than the supply curve. This makes a situation where the monopsony firm hires less people at a lower wage since it wants its mc=mr.
Graph for clarity: https://images.app.goo.gl/7uUyTiqtiKJFa4Ty7
However, I'm confused why with a minimum wage set, all of the sudden, the original mc curve doesn't matter anymore. Shouldn't the monopsony still not want to hire more people (and maybe even hire less people) if the cost of labor is higher?
Can someone make a real life example of this in practice?
Edit: I understand the graphical way why it happens, I just need help understanding it in the real world and why would the monopsonist have a different philosophy in hiring people with a minimum wage in place instead of when it hires people when the monopsonist makes the wages.
Words you might not have heard of -
- nocebo: a harmless substance that when taken by a patient is associated with harmful effects due to negative expectations or the psychological condition of the patient.
- pudor: An appropriate sense of modesty or shame.
- monopsony: the market condition that exists when there is one buyer.
- majuscule: A large letter, either capital or uncial, used in writing or printing.
- calligram: A word, phrase, or piece of text arranged to form a picture of the subject described.
These words are taken from vocabulary app - Vocab Assistant
Monopsony is common in small towns, regions with few people, etc. but it would be interesting to see it on a larger scale than just the small towns it's common in. Are there any good examples of monopsony affecting an entire city, state, country, or even having global influence?
*As opposed to just having to offer the additional worker a higher wage
