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Monopsony Power? Really?

Here’s a letter to the Wall Street Journal:

Jason Furman and Alan Krueger leap far too fast from the existence of non-compete clauses in labor contracts, and unavoidable “frictions” in searching for new jobs, to the conclusion that American labor markets are plagued by monopsony power (“Why Aren’t Americans Getting Raises? Blame the Monopsony,” Nov. 4).  It’s telling that the only specific example they offer of alleged monopsony is collusion by hospitals to depress the wages of registered nurses.

Few industries in the United States are as beset with entry barriers and occupational-licensing restrictions as is the healthcare industry – an industry saddled with prohibitions on nurses operating their own healthcare practices, as well as with government-erected obstacles to the opening of new healthcare facilities.  My colleagues Thomas Stratmann and Chris Koopman find, for example, that “[c]ertificate-of-need laws in 36 states and the District of Columbia restrict competition in healthcare facilities markets by requiring healthcare providers to obtain permission before adding or expanding any regulated facilities or services.”

Because these restrictions and impediments thwart competitive market forces that would otherwise prevent monopsony power from emerging, it’s unsurprising to find instances of such power in the healthcare industry.  And it is therefore illegitimate to use an instance of monopsony power in the healthcare industry as evidence that monopsony power runs rampant throughout the economy.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

This essay by Furman and Krueger is a parade of poor analysis and economic fallacies.  When I have more time, I hope to blog on other of these fallacies.