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A Note On Alleged Monopsony in Labor Markets

Pasted below is an e-mail from Charley Hooper, sparked by this earlier blog post:

I apologize if this point was covered in your blog, but don’t “search and matching frictions” affect both employee and employer, giving each a modicum of monopoly power?

As an employee, it may be difficult for me to find and move to a better job. As an employer, it may be difficult for me to find and hire a better employee. Both employee and employer are simultaneously at a disadvantage and, consequently, have power over the other because of the others’ disadvantage.

Yep.  (Anyone who denies Charley’s point is someone who likely has never hired and managed workers.)

Put differently, the same sorts of unavoidable realities called “frictions” that allegedly give to each employer some monopsony power over employees also operate to give to each employee some monopoly power over employers.  And so if one accepts as valid and enlightening the new “dynamic” monopsony story, one must also accept as valid and enlightening Charley’s point.

A temptation, then, is to analyze all employer-employee relationships as bargaining by bilateral monopolists.  But I believe that this move would cast more darkness than light upon real-world labor markets, for very few employers truly are monopsonists and very few employees truly are monopolists.  In the United States, entry into most industries and occupations (especially low-skilled occupations) is unobstructed by significant legal barriers.  Existing above-normal profits – or below-‘market’ prices or wages – supply powerful incentives for entrepreneurs and other market participants to exploit these situations in ways that reduce above-normal profits and raise below-‘market’ prices or wages.  From a market-process perspective, there is genuine, rivalrous competition among employers for workers, and genuine, rivalrous competition among employees for jobs.  There is no good reason, in most labor markets today in the U.S., to suppose that the failure of these markets to look like the static, equilibrium outcomes that appear in economics textbooks reflects an absence of genuine, rivalrous, dynamic competition.