Is monopsony important for understanding the U.S. labor market?

Monopsony is not a word that rolls off the tongue, but it’s increasingly a term that anyone paying attention to the U.S. labor market should understand. Monopsony refers to a market where there is only one buyer, in contrast to the more familiar term monopoly, which refers to a situation where there is only one producer in a market. While it’s very uncommon to see a situation of only one buyer, monopsony is a useful way to understand important trends in the U.S. labor market, such as inequality, declining worker mobility, and the gender wage gap. A new report from the President’s Council of Economic Advisers details the influence of monopsony.

But first, some quick background on the theory of monopsony. In a perfectively competitive labor market, something like monopsony does not happen. Employers and employees are both “price takers,” meaning that their individual actions have no control over the wages employers will pay employees. That wage setting happens through the impersonal collective workings of the labor market. In contrast, in a monopsonic labor market, employers do have the power to set wages and can use this wage-setting power to reduce the wages of workers below what would normally prevail in a perfectly competitive labor market. Of course, an actual monopsonic market where there is only one employer rarely happens, yet monopsony can be a useful basis for understanding how employers in industries where there are few competitors for workers can have wage-setting power over their employees.

How does monopsony happen? The new Council of Economic Advisers report runs through a number of ways that firms could have wage-setting power in the U.S. labor market. The first is that firms in the U.S. economy are becoming more concentrated, giving them more power not only in the markets for the goods and services they provide but also in the markets for the labor they hire. The council’s report also notes that direct collusion by employers and the use of restrictive non-compete agreements can give employers wage-setting power. The CEA authors also note that “job lock”—induced by employer-provided health insurance—can make workers more reticent to leave a job and therefore give more bargaining power to employers.

What these sources of monopsony power (and others mentioned by the report) have in common is that workers are denied or hindered in the ability to use another job as a bargaining option. That appears to be a major source of the power imbalance—that employers are restricted in finding other jobs. The policy options proffered by the CEA report include policies that would directly increase the bargaining power of workers, such as increasing unionization and a higher minimum wage.

The new report also suggests policies that would help increase the mobility of workers between jobs, such as curbing the use of non-compete agreements so workers can more easily move to new jobs, paid family and medical leave to help workers deal with family responsibilities that often hinder job switching, and reforming land-use regulations to allow for more housing in areas where workers are more in demand. Empowering workers in this way may be an effective way to counteract the creeping influence of monopsony in the U.S. economy.