My good friend and fellow blogger Don Boudreaux argued yesterday against Eric Posner’s claim that monopsony is widespread in U.S. markets.
I agree with Don that it’s not.
However, I don’t agree with either of his two major arguments for why it’s not widespread.
Here’s Don’s first argument:
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.
The problem with this argument is what we at UCLA when I was a graduate student called a “rate versus levels” issue. Let’s say we accept, which I do, that growth in worker pay has kept pace with growth in worker productivity. That does not mean that pay has kept pace with productivity. It could be the case that productivity and real pay each grow at 1 percent a year. It could also be the case, at the same time, that pay is 10% below productivity. The latter would be evidence of monopsony even though the former is correct.
I’m not saying that there is a monopsony. I am saying that if there’s a systematic gap between pay and productivity, both could be growing a the same rate and that would not be evidence against monopsony.
Don’s second argument is a version of “If you’re so smart, why aren’t you rich?” Don writes:
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.
Here’s my problem with that argument. Many skills are required to run a successful business. Understanding that workers are underpriced is not the only element required for Posner or others to succeed. They also need to know how to market a product, how to produce a product, how to respond to competitors, how to find workers, how to motivate workers, how to deal with intrusive governments, etc.
I’ll give an example from my own life. In the early 1980s, when I was an economist in President Reagan’s Council of Economic Advisers, I thought I had a way of importing Japanese cars from Guam and avoiding Reagan’s restrictions on Japenese imports. Reagan and his U.S. Trade Representative Bill Brock always emphasized that these were not formally Reagan’s restrictions but, instead, were a voluntary export restraint imposed by Japan’s government on its own car exports.
So I thought that one could buy cars in Japan and ship them to Guam and then ship them to the United States. The Japanese exporters would not be violating their government’s restraint and the U.S. government had no legal say.
So I went to a major free-market-oriented lawyer in the Reagan administration who was in my building to run my idea by him. I wanted to see if he thought my legal reasoning held water. Also, he was independently wealthy and I thought he might be willing to put in $1 million or so to make it happen.
He told me that my idea might hold water and we should think about it. After about a day, he got back to me with the slam-dunk argument against going ahead. He pointed out that if I was right, that’s all I knew. I didn’t know how to buy 1,000 cars, how to ship them, how to sell them in the United States, etc. So even if our margin on the cars was as much as $1,000 on each (a big number in 1983) we could easily lose that or more by screwing up on the other elements.
READER COMMENTS
Andrew_FL
Sep 29 2021 at 1:29am
You can easily rephrase Don’s second argument in a way that works I think. Posner might not be in a position to act on his knowledge, but by putting forth the argument that monopsony is widespread throughout labor markets, he has put this knowledge within the reach of plenty of more capable entrepreneurs than himself. So if it were true, surely someone would be able to take advantage of it, if not Posner himself. And yet no one has, or if they have, they’ve already eliminated the monopsony by doing so, rendering Posner’s argument false.
robc
Sep 29 2021 at 9:20am
Or Posner could partner with a CEO capable of taking advantage of the situation. Posner could use his economic research to determine the areas (industry? region?) of monopsony and let the CEO use the advantage for profit.
Or Posner could provide consulting services on monopsony to many companies, allowing all his clients to take advantage of his ability to identify monopsonies.
Knut P. Heen
Sep 29 2021 at 4:05am
There is some monopsony power because there are costs associated with changing employer. Suppose you have a strong preference for living in a certain location and there is only one good match for your skills in this location. The outside opportunities at the location are bad, and all other outside opportunities are in less preferred locations. In such a case, you may accept a pay that is less than your marginal productivity. If you value living at this particular location at $10,000 a year, you may accept working at this employer for up to $10,000 a year less than your outside opportunity elsewhere. But, shouldn’t you be happy that this employer actually set up shop in your preferred location?
Philo
Sep 30 2021 at 6:15pm
There is also some monopoly power on the part of the typical employee, since it would probably cost the employer an appreciable amount to hire and train a new employee to replace an old one. Small amounts of monopoly and monopsony power pervade the economy.
Jon Murphy
Sep 29 2021 at 7:16am
Don does respond to your second point here.
To you first point, it is legitimate, but I think that is more imprecise wording on Don’s part rather than a flaw in the argument. The two studies he links to find that there is no gap between worker productivity and worker wages, so I think it’s reasonable to read him as not making the rate v. level issue you raise.
David Henderson
Sep 29 2021 at 11:37am
Thanks.
Thank you. I’ll take a look at the studies.
David Henderson
Sep 29 2021 at 6:16pm
Jon,
I looked at both studies. You wrote:
That’s incorrect. My taking Don at his word that he was comparing growth rates of wages and productivity was correct. He never addressed, not that it’s easy to do, whether there is a gap between productivity and real wages.
Vivian Darkbloom
Sep 29 2021 at 9:38am
“So I thought that one could buy cars in Japan and ship them to Guam and then ship them to the United States. The Japanese exporters would not be violating their government’s restraint and the U.S. government had no legal say.”
It surprises me that you got even a “might work” on this for a number of reasons. First, the judicial doctrine of “substance over form” should dictate that the actual export was from Japan to the US. On this, the US in particular has had plenty to say. This is also consistent with the fact that the US customs territory does not include Guam or other US territories other than Puerto Rico. See, 19 CFR Section 101.1
Finally, under the “rules of origin” under international trade law, the origin of the cars would be Japan, not Guam. See, https://sgp.fas.org/crs/row/RL34524.pdf
I suspect that your government legal contact, while a “free-market-oriented lawyer”, was no expert in international trade law!
David Henderson
Sep 29 2021 at 11:39am
Thank you.
By the way, he didn’t claim to be an expert on international trade law. What he figured out, correctly, was that the other issues were big enough that there was no point in researching whether the loophole I thought I found really was a loophole.
Rob Rawlings
Sep 29 2021 at 10:06am
If monopsony is created and protected by government regulations then even a really smart entrepreneur will struggle to implement a business idea that will be able to take advantage of the monopsony situation.
I suspect this may be true of the current US economy.
Jon Murphy
Sep 29 2021 at 10:46am
Where is there a government supported monopsony of the entire labor market in the US economy?
Rob Rawlings
Sep 29 2021 at 11:55am
There are a myriad of regulations that have the effect of protecting large dominant businesses by increasing the entry cost for potential competitors. This will reduce wages for workers in these business-lines below what they would be without the government intervention and potentially create an artificial monopsony situation.
Jon Murphy
Sep 29 2021 at 4:44pm
Eh, perhaps on a small scale, yes. But, again, the us has about 32.5 million firms.
Rob Rawlings
Sep 29 2021 at 9:57pm
OK, I agree that my claim that the current US economy is widely monopsonistsic as a result of government regulations remains unsubstantiated.
However my main point was intended to be that if monopsony did exist as a result of government regulation then Don’s claim that it could be addressed by entrepreneurial action would not stand.
steve
Sep 29 2021 at 4:06pm
I think people who dont believe in monopsonies never lived in a small “company town”.
Steve
Jon Murphy
Sep 29 2021 at 4:43pm
To say a monopsony exists in a “small company town” is one thing. To claim an economy with approximately 32.5 million firms is a monopsony, or even that monopsony power exists to a significant degree, is a whole other thing.
Don Boudreaux
Sep 30 2021 at 8:33am
Steve: Economic historian Price Fishback found evidence that sightings of monopsony power in company towns are much exaggerated. (Remember: People mostly choose to live in company towns.)
Don Boudreaux
Sep 30 2021 at 8:37am
Steve:
I meant, but forgot, in my previous comment to link also to this short piece by Claudia Williamson.
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