From the University of Chicago, Booth School of Business' Chicago Booth Review, May 19:
Labor’s share of national income has fallen, and competition for workers may have something to do with it.
Talk to almost anyone about the forces at work behind Western politics’ contemporary upheaval, and it will not take long for your conversation to reach the discontents of the working class. In the United States, President Donald Trump, who campaigned heavily on policies such as restricting immigrant labor and boosting domestic manufacturing, won the 2024 election in part due to the support of voters making less than $100,000 a year. Polling data suggest that economic policy was more important to voters than during any presidential election since the Great Recession.
One source of this anxiety may be the labor market. Although unemployment has been low in recent years, some evidence suggests wages—particularly for those outside the managerial ranks—have not kept pace with economic growth for decades. An analysis by the Economic Policy Institute finds, for example, that since 1979 US productivity has increased more than 85 percent, but hourly pay for production and nonsupervisory workers has gone up just over 30 percent.
Meanwhile, the corporate world’s most familiar names seem to be thriving as economic power is consolidated among fewer and fewer companies. Many markets have what Chicago Booth’s Christina Patterson and her colleagues in a 2020 paper describe as a “winner takes most” dynamic, with sales increasingly accruing to the most productive companies over time. Researchers are only beginning to get their arms around the social, economic, and political implications of this concentration.
Economists’ textbook method of measuring a company’s leverage over markets has involved estimating how much it’s able to charge for goods and services above its marginal costs of producing them. The wider this gap, the greater the seller’s market power. Taken to the extreme, the ability to dictate prices reflects one of the best-known, and best-studied, phenomena in economics: monopoly.
In many cases, however, companies may be flexing their market power in a somewhat less obvious way—not by marking up what they charge for products, but by marking down what they pay for the inputs those products require. In such a case, market power wouldn’t take the form of a monopoly, but rather its close cousin, a monopsony, or the ability of a buyer to dictate the prices it pays.
The inverse of a monopoly, monopsony occurs when a market has a single buyer.
“A lot of people had ignored it,” Chicago Booth’s Chad Syverson says of monopsony power. “In the past 10 years, there’s been a concerted effort to measure it, and it does seem to be a big deal.”
If monopsony is more prevalent than economists have traditionally assumed, it may play an important role in suppressing the price of one of the most closely watched and socially important inputs to virtually every product: labor. Economists’ efforts to detect and understand monopsony, therefore, could be pivotal to revealing the causes of workers’ frustration
A world of wedges
In the free-market nirvana that provides the setting for many theoretical economic models, competition is unfettered and alternatives are always close at hand. So many producers vie to sell goods and services that none can raise prices without sending their customers scurrying to rivals. The result is that the price a company charges for its product equals or is very close to its marginal cost of production—that is, the cost of producing one additional unit.
Conversely, buyers are so plentiful that any who demand discounts from suppliers get turned away. Therefore, the price a company pays for any given element it uses to produce its goods or services—its inputs—should be equal to how much an additional unit of that element increases the company’s output. Economists call this the input’s marginal product.
In the real world, things get complicated. For one, companies don’t just have variable costs—the costs of the labor, materials, and other inputs that go into the product—but also fixed costs such as facilities, equipment, insurance, and other overhead. The need to pay off these costs is one reason companies might charge more than the marginal cost of production....
....MUCH MORE
As noted in the intro to 2018's "Let's Get Ready to Rumble: Paul Krugman vs Joan Robinson on Trade":
Joan Robinson was a Cambridge economist who helped develop post-Keynesian econ. We first mentioned her in 2007 in relation to her coinage of the word "monopsony".
As a female economist she went straight up against the male hierarchy, eventually becoming the first female fellow of Kings College....
We had a couple posts using the word before that, in relation to commodities, here's 2008's "Today's Word is Monopsony: mə-ˈnäp-sə-nē, II". But we posted only once using the term in regards to labor—capital, March 2019's "Some Peculiarities of Labor Markets: Is Antitrust an Answer?":
From Timothy Taylor, The Conversable Economist:
Labor markets are in some ways fundamentally different from markets for goods and services. A job is a relationship, but in general, the worker needs the relationship to begin and to last more than the employer does/ John Bates Clark , probably the most eminent American economist of his time, put it this way in his 1907 book, Essentials of Economic Theory
"In the making of the wages contract the individual laborer is at a disadvantage. He has something which he must sell and which his employer is not obliged to take, since he [that is, the employer] can reject single men with impunity. ... A period of idleness may increase this disability to any extent. The vender of anything which must be sold at once is like a starving man pawning his coat—he must take whatever is offered."
In the last few years, an idea has emerged that the same government agencies that are supposed to be concerned about monopoly power--that is, when dominant firms in an industry can take advantage of the lack of competition to raise the prices paid by consumers--should also be concerned about "monopsony" power--that is, when dominant firms in an industry can take advantage of the lack of competition to reduce the wages paid to workers. Eric A. Posner, Glen Weyl and Suresh Naidu offer a useful overview of this line of thought in "Antitrust Remedies for Labor Market Power," published in the Harvard Law Review. (132 Harv. L. Rev. 536, December 2018). My own sense is that their discussion of the power imbalance in labor markets is fully persuasive, but it also seems to me that antitrust is at most a very partial and incomplete way of addressing these issues.
Here's a nice explanation from Posner, Weyl, and Naidu of why workers have reason to feel vulnerable to the monopsony power of employers in labor markets (footnotes omitted)...
Nothing against Professor Taylor, after all he's a founder (along with Stiglitz and Shapiro) and current managing editor of the AEA-published Journal of Economic Perspectives and we've linked to his personal blog for years, but I've never felt the urge to introduce him with this:
