Monopsony Power in Labor Markets?

by Don Boudreaux on August 20, 2004

in Competition

Arnold Kling, with his usual deep insightfulness, addressed Alan Krueger’s August 19th New York Times column on labor markets. In that column, Krueger mentions Alan Manning’s 2003 book Monopsony in Motion.

Here’s a description of Manning’s book that I found on Amazon.com:

What happens if an employer cuts wages by one cent? Much of labor economics is built on the assumption that all the workers will quit immediately. Here, Alan Manning mounts a systematic challenge to the standard model of perfect competition. Monopsony in Motion stands apart by analyzing labor markets from the real-world perspective that employers have significant market (or monopsony) power over their workers. Arguing that this power derives from frictions in the labor market that make it time-consuming and costly for workers to change jobs, Manning re-examines much of labor economics based on this alternative and equally plausible assumption.

I’ve not read Manning’s book, but judging from Krueger’s comment on it, this description seems to be accurate.

Put aside the straw man of “perfect” labor markets. No serious economist believes that an employer who cuts the wages he pays by one cent will lose all of his employees – immediately or otherwise.

Without doubting that genuine monopsony power is harmful, I dispute the implication that the absence of textbook perfection in labor markets is evidence of such power.

I have some evidence that workers – even (especially?) low-skilled workers – are extraordinarily mobile: the fact that the United States government posts armed guards along its border to keep Mexicans from entering the U.S. to work tells me that workers are willing and able to move great distances, both physically and culturally, to find higher wages and better working conditions.

If humble Mexicans must be threatened with guns and prison to keep them from migrating from poorer jobs in Mexico to better jobs in the U.S., it seems incredible that workers legally within the U.S. are stuck for any length of time in jobs offered by employers with monopsony power.

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