David R. Henderson  

Henderson on Monopsony Power in Labor Markets

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David R. Henderson, an economist at the conservative Hoover Institution, said the existence of additional options outside a worker's current occupation or city made him skeptical that concentration was having an effect on wages. Skilled workers, he said, can seek out opportunities in other cities. Less-skilled workers can change occupations relatively easily.

"Because they're unskilled, they fit in many kinds of jobs, and so you have more employers at the local level," Mr. Henderson said.

Some manufacturing industries, like breakfast cereal and tobacco, are even more concentrated than farm equipment. But since many workers in those businesses are less skilled than farm-equipment mechanics, they may be more interchangeable with workers in other industries.

To the extent that less-urban areas have a problem, Mr. Henderson added, policymakers should make it easier for people to move to cities where there are more opportunities, perhaps by easing building restrictions that drive up housing prices. That suggestion was also raised in a report on employers' market power by President Barack Obama's Council of Economic Advisers.


This is from Noam Scheiber and Ben Casselman, "Why Is Pay Lagging? Maybe Too Many Mergers in the Heartland," New York Times, January 25, 2018. (Print edition is January 26.)

Because of my 4-part series on monopsony in labor markets in October 2016 in which I dissected a report from President Obama's Council of Economic Advisers, Ben Casselman reached out to me to ask my thoughts on José Azar, Ioana Marinescu, and Marshall I. Steinbaum, "Labor Market Concentration," NBER, December 2017. The ungated version is here.

I took some time to read it and spoke to him the next day. I'm very pleased that he quoted me accurately.
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Ben left out one major criticism (I'm not blaming him--as long as he quotes me accurately and doesn't take me out of context, it's good). To measure concentration, the authors used data from CareerBuilder.com. What's wrong with that? Here's the extreme example I gave Ben. Let's say that you have 1,000 employers of a particular kind of labor in one area. What if only 2 of them are hiring? Then the data from Azar et al will show a highly concentrated market. Ben told me that he had wondered about that too and had asked Azar. Azar had answered that that's not a problem because if only 2 firms are hiring, that's what's relevant to job seekers. I told him I didn't think that was a good answer: the worker has 998 more potential employers and the odds are that some of them, within a few months, will be hiring.

I've thought about it more since then. I think my point is even stronger. Let's say that none of them is hiring in the next few months. It's still the case that there's potential competition among employers for workers. It's hard to believe that the wage would be much lower because only 2 firms are hiring if there are 998 other employers of the same type of labor.


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CATEGORIES: Labor Market




COMMENTS (5 to date)
Brandon Berg writes:

If there are a thousand firms employing unskilled labor, and none of them are currently hiring, that would seem to me to imply that wages are likely above the market-clearing level. It's hard to square this with a story about concentration suppressing wages below the market-clearing level.

David R Henderson writes:

@Brandon Berg,
Really good point.
I’m embarrassed, as a card-carrying economist, that I didn’t think of that. Thank you.

Ahmed Fares writes:

I learned from Don Boudreaux that in order to exploit labor, a business would have to have a monopsony in labor markets, and a monopoly in output markets.

Without the latter, competition drives price to cost such that the lower wages pass through to the benefit of consumers in the form of lower prices, leaving real wages unchanged.

A good example of this is the right-to-work states, where wages are lower than wages in union states, but then again so are prices, because those same low wages feed through to lower prices.

Incidentally, this is what happened in the Great Depression. While wages fell, prices fell faster than wages, which meant that real wages were actually rising. Wages were sticky downwards.

In the inflationary 1970's, and with strong unions and low unemployment, workers had great bargaining power such that wages were rising quickly. But prices were rising faster with double-digit inflation, i.e., the wage-price spiral. I believe that in that case, real wages were falling. It appears that wages are sticky upwards also.

So it appears that paradoxically, weak worker bargaining power leads to higher real wages, while strong worker bargaining power leads to lower real wages.

As Scott Sumner said: "Economics is the queen of the counterintuitive sciences."

Thaomas writes:

@ Ahmed Fares

The research refers to local monopsony. Your observations much wider/national level trends.

OH Anarcho-Capitalist writes:

@ahmed -

"In the inflationary 1970's, and with strong unions and low unemployment, workers had great bargaining power such that wages were rising quickly."

Not exactly - the 1970s were hardly a period of low unemployment https://data.bls.gov/timeseries/LNU04000000?periods=Annual+Data&periods_option=specific_periods&years_option=all_years

And total union membership was solidly declining after its peak in 1955.

During the Great Depression, wages were sticky downward primarily due to government interventions in the labor markets like the Minimum Wage Act, the Wagner Act and the Davis-Bacon Act...

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