Monopsony Power
Monopsony power is the ability of a buyer to influence the price it pays for a good or service, or to set terms of purchase, because it is a large or dominant purchaser in a market. It is the mirror image of monopoly power, which is the ability of a seller to influence the price it receives. Monopsony power is most often discussed in labour markets, where a dominant employer can pay wages below the competitive level, but it also arises in markets for inputs and in procurement.
Monopsony in labour markets
In a labour market with a single employer, or with few employers, the employer faces an upward-sloping supply of labour: to attract more workers, it must offer higher wages, and the wage it pays must rise for all workers it employs, not only for the additional one. The marginal cost of labour therefore exceeds the wage, and the employer hires fewer workers and pays a lower wage than would prevail under competition. Employment and wages are both below the competitive level, and the employer captures a benefit at the expense of workers.
Monopsony power does not require a single employer. Where employers are few, where workers face high costs of changing jobs, or where jobs are differentiated by location or skill, employers have some discretion over wages. Measures of labour market concentration, based on the shares of employers in a local market, are used to assess the extent of monopsony power, and research finds that many labour markets are more concentrated than previously thought.
Sources of monopsony power
Monopsony power arises from several sources. Concentration of employers in a local labour market, particularly in smaller towns or where a single industry dominates, creates the classic case. Mobility costs, including the expense and disruption of moving, lock workers into local markets and reduce their alternatives. Search frictions, in which workers must spend time and effort to find new jobs, give employers some discretion over wages.
Specialised skills also create monopsony power, because workers with skills valuable mainly to a few employers have limited alternatives. Non-compete clauses, which restrict workers from joining competitors, can reinforce employer power. In markets for inputs, monopsony power arises where a single buyer is the main purchaser of a product, as with a large processor buying from many small farmers, or a large retailer buying from many suppliers.
Effects
Monopsony power reduces wages and employment relative to the competitive outcome, and it transfers surplus from workers and suppliers to the buyer. The reduction in employment is a welfare loss, and the transfer raises concerns about distribution, particularly when workers have few alternatives and limited bargaining power. In input markets, monopsony power can depress the prices received by small producers, reducing their incomes and their incentives to invest.
The effects extend beyond the directly affected markets. Reduced wages can raise the returns to capital and increase inequality. Lower prices paid to suppliers can slow investment and reduce quality. In the case of labour, the exercise of monopsony power can reduce the incentive to acquire skills, because the returns are captured by the employer, and it can depress local demand, since workers have less income to spend.
Policy responses
Policy responses to monopsony power include measures to increase competition among employers, to reduce barriers to mobility, and to strengthen the bargaining power of workers. Antitrust enforcement can prevent mergers that would increase employer concentration, and it can challenge agreements among employers not to compete for workers. Reducing non-compete clauses and occupational licensing barriers can expand workers' alternatives.
Minimum wages can raise wages in monopsonistic labour markets without reducing employment, and may even increase it, because the employer's marginal cost of labour is affected differently. Collective bargaining can counter employer power by allowing workers to negotiate jointly. Policies that improve information and reduce search costs, such as job matching platforms, can also reduce monopsony power. The appropriate mix of policies depends on the sources of the power and on the characteristics of the market.
Measurement of employer concentration
Measuring monopsony power requires data on the concentration of employers in the markets where workers seek jobs. Analysts use measures such as the share of employment accounted for by the largest employers in a local labour market, and indices of concentration, and they construct these measures using detailed data on establishments and commuting patterns. The results show that many labour markets are more concentrated than national averages suggest, particularly in smaller metropolitan areas.
The measurement is sensitive to the definition of the market. A market defined by a narrow occupation and a small geographic area will appear more concentrated than one defined broadly, and the appropriate definition depends on the mobility of workers and on the substitutability of jobs. Research therefore examines a range of definitions and reports the sensitivity of the results, and it combines concentration measures with evidence on wages to assess the extent of monopsony power.
Evidence on wages and employment
Empirical research finds that higher employer concentration is associated with lower wages, consistent with the exercise of monopsony power. Estimates suggest that the effect can be substantial, with wages in concentrated markets several per cent lower than in competitive ones, and that the effect is larger for workers with fewer alternatives. The evidence also suggests that the relationship is not merely a correlation, since studies using changes in concentration over time find corresponding changes in wages.
The implications for employment are more complex. In a simple monopsony model, both wages and employment are below the competitive level, so that policies that raise wages can also raise employment. The evidence on this prediction is mixed, but some studies find that minimum wages and increases in competition raise employment in concentrated markets, consistent with the monopsony framework, while in competitive markets the effects are smaller or absent.
Policy implications
Monopsony power has implications for a range of policies. Antitrust enforcement can challenge mergers that would increase employer concentration and agreements among employers not to compete for workers, such as no-poach agreements. The regulation of non-compete clauses and of occupational licensing can expand the alternatives available to workers and reduce employer power, and it has attracted increasing attention from policymakers.
Minimum wages can raise pay in monopsonistic markets without reducing employment, and may increase it, which provides an additional rationale for a wage floor beyond the objective of reducing poverty. Collective bargaining, by allowing workers to negotiate jointly, can counter employer power, and policies that improve information and reduce the cost of changing jobs can make labour markets more competitive. The appropriate mix depends on the sources of the power and on the characteristics of the labour market.