Amid all the other kerfuffle in the past couple of weeks, Congress held hearings on growing evidence of “monopsony” power in labor markets. For those lucky few who didn’t take a labor economics course, monopsony is simply the ability of a few large local employers to control local labor markets. The worry is simply that monopsony causes wages to be lower and grow more sluggishly than they would in competitive markets. The hearing featured a host of young researchers whose work is unlocking growing evidence of this problem.
This growing focus on monopsony power in local labor markets comes at a time of similarly increased scrutiny of monopoly power in technology and health-care companies. Across much of the nation, we see firms exercising more power both in markets for goods or services as well as markets for workers.
Some of the best work on monopsony comes from Jose Azar, Ioana Marinescu and Marshall Steinbaum. They examined data on job openings in commuter zones from the commercial site CareerBuilder.com. They report significant market concentration of job openings, a prime measure of monopsony. They also found that for the same occupation, wages dropped as markets became more concentrated.
The good news is that in their map of concentration, Indiana fared pretty well. Unsurprisingly, the places that did worse than Indiana had distant rural counties. Indiana has lots of rural places, but we are a compact state. More than 85 percent of Hoosiers live within a short drive from an urban area, so job location choices are relatively good here. The bad news is that for many occupations, nearly every commuting zone in the nation is concentrated, so doing relatively well is poor consolation. Still, the most interesting result from research on monopsony power is not merely the negative wage effect, but two other warning signs.
First, monopsony power may be a leading contributor to urbanization. Large urban labor markets are less concentrated, so workers will find them more attractive. Over the past two decades, the rate of urbanization has accelerated, causing significant population decline in rural, small towns and medium-sized cities. This problem is long past the critical stage in Indiana, with only a few counties experiencing meaningful population growth in this century.
Second, monopsony power can lead to the perception of labor shortages. Naturally, firms operating in monopsony markets will wish to hire a nearly endless supply of workers. After all, wages are beneath the competitive level. But, as I must often remind policymakers, workers also get a choice. Wages below the competitive level will attract only those workers without the ability to relocate. Thus, firms mistake the presence of monopsony power for a labor shortage. Indeed, several technical studies identifying complaints of “reported vacancies” without growing wages is strong evidence of monopsony power.
In the end, the level of monopsony power is an empirical question. Economists should be spending more time and energy expanding analysis of these issues. As that occurs, we can also think through policies that limit the expansion of monopsony markets. For example, the research center I direct no longer conducts occupational wage surveys. In my judgment, these were used too often to suppress wages. I took this action before the Federal Trade Commission warned human resource officials about the practice in 2016.
The congressional testimony argued for a broad expansion of anti-trust enforcement. This follows that important 2016 FTC warning listing civil enforcement against hospitals, technology companies and trade associations for violating laws designed to ensure competitive labor markets. So, it seems likely that both state and federal governments will begin more earnest review of their anti-trust enforcement. That will be good for workers, for communities that suffer through monopsony and for firms that pay competitive wage rates.
Michael J. Hicks, Ph.D., is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].
