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Assertions are Cheap

Here’s a letter to a new and very persistent correspondent:

Ms. S__:

You’re correct that I didn’t blog on Eric Posner’s recent New York Times op-ed on the alleged prevalence of monopsony power in U.S. labor markets. You’re incorrect to infer that I therefore “accept American workers are victims of employer monopsonists.”

First, the New York Times is a roaring Niagara of economic fallacies. It’s impossible for anyone – never mind someone of my modest abilities – to address more than a tiny puddle of these.

Second and more substantively, the assertion of widespread monopsony power fails the smell test.

To back his assertion, Prof. Posner refers to “academic research on labor markets” that allegedly shows that “millions of Americans are paid thousands or even tens of thousands of dollars less than they should be paid.” Well, I can point to academic research on labor markets that shows the opposite, namely, that growth in worker pay has kept pace with growth in worker productivity. (See, for example, here and here.) This finding is inconsistent with the prevalence of monopsony power.

But in practice very few public-policy debates are settled by dueling academic studies. The reason Prof. Posner’s assertion fails the smell test is that it implies that billions of dollars of profits are available in plain sight with no entrepreneurs alert enough to seize these profit opportunities.

Underpaid workers – that is, workers who are paid less than the amounts they contribute at the margin to their employers’ revenues – are akin to underpriced shares of stock. These undervaluations might exist for a short time, but very soon alert entrepreneurs or investors notice and seize them. Just as underpriced stocks are bought in a manner that bids their up their prices, so too are underpriced workers hired in a manner that bids up their pay.

If Prof. Posner, along with the academic researchers he cites in support of the claim of widespread monopsony power are correct, they should stop writing papers and op-eds about the problem and instead start their own companies – companies that will bid away these underpriced workers from their current employers and, in the process, raises workers’ wages. Because in this case there is no good reason why Prof. Posner should not put his own money and effort where his mouth is, the fact that he doesn’t do so tells me that he either does not really believe his assertion or, more likely, that he doesn’t understand just what it is that he’s asserting.

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 2203