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alan-manningMonopsony decreases worker mobility, keeping wages lower than they would be in a competitive market, writes Alan Manning.

You have almost certainly heard of monopoly, but less likely to have heard of monopsony. The literal definition of monopoly is a situation where there is only one seller of a product; though the term is used more loosely to refer to the case where there are a few sellers and not much competition between them. They have what is called ‘market power’ – some ability to set their own prices. The consequence of monopoly is that prices are higher than they would be in a competitive market. Monopsony refers to the same idea but for employers; the consequence is that wages are lower than they would be in a competitive market.

In the labour market employers have monopsony power because it is hard to change jobs. An employer that pays lower than average wages may find it harder to recruit and retain workers but is still able to hire some.

Monopsony is not a new idea – it was invented by the economist Joan Robinson in 1933. On paper, the competition laws of many countries (including the UK) could be applied to monopsonists just as much as monopolists. In practice, there was almost no action taken on monopsony; in the US many mergers have been blocked because of fears they would increase monopoly power, but none have been blocked because of concerns about increased monopsony power.

In the US that began to change when it became apparent that some employers were engaging in what seemed to be blatantly anti-competitive practices in the labour market. In one case – eventually settled out of court – household names Apple, Google, Intel, Adobe, Lucasfilm, Pixar and Intuit were accused of having agreements between them to limit the hiring of each other’s workers. Steve Jobs tried at one point to enter a similar arrangement with Palm, to be told by its CEO that such an agreement was immoral and likely illegal, at which point Steve Jobs appeared to threaten Palm with litigation over alleged patent infringements. In response to this and other cases, the US Department of Justice issued guidance on HR practices in 2016.

Other countries are yet to take this as seriously.

In product markets, a practical way to limit monopoly power is to increase the ability of customers to change who they buy from.

Similarly, measures to increase the mobility of workers is a powerful way to limit the monopsony power of employers. Yet, we do not do this. Imagine you want to change the supermarket where you want to buy your groceries; your existing supermarket allows this but only if your new shop is more than half a mile from them. Unthinkable! Yet many workers sign employment contracts containing non-competes or restrictive covenants which limit their ability to work for rival employers in the future. In the UK, the High Court has ruled it acceptable for a hairdressing salon to prevent its employees from working for other salons within half a mile. Half a mile might not sound like much but 50% of commutes for hairdressers are less than 10 minutes so this may be a sizeable reduction in employment opportunities.

Utility regulators in the UK have actively made it easier for consumers to switch supplies of gas, electricity, water etc in the belief that this promotes competition. Yet, your employment contract probably contains a lengthy notice period that makes it harder for you to change employers. These notice periods are so normal that we do not reflect on whether they are anti-competitive.

The monopsony power of employers has long been an unrecognised problem, but it may also be an increasing problem. In my Marshall lecture for the 2020 European Economic Association Conference, I present evidence that the monopsony power of employers has been increasing over time. Contrary to common belief, labour markets are becoming less dynamic and one consequence of this is to increase the monopsony power of employers.

So, what can be done about monopsony? One approach is to directly raise wages, e.g., through minimum wages. This approach has its place but can only help to address monopsony power at the bottom end of the labour market. Elsewhere, perhaps we need measures to give countervailing power to workers, either through a more supportive environment for trade unions or giving workers a louder voice on boards. Trade unions are often accused of raising wages above competitive levels but if we start from a point where wages are too low, we want wages to be higher.

The competition authorities need to be more alert to the possibility of anti-competitive collusive practices among employers. In the Wealth of Nations, Adam Smith wrote that “We rarely hear …of the combination of masters; though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject.” It has taken us over 200 years to realise that he had a point.

We also need to think about how to regulate what is and what is not allowed in employment contracts, including non-competes and notice periods but also zero-hours contracts and fake self-employment among many other issues. The general approach here is too often hampered by the view that if an employer and worker voluntarily sign a contract, the presumption is that both parties benefit from it (otherwise they would not have signed it). But in labour markets (and some other markets) we often have a situation akin to one where a professional is interacting with an amateur; an employer typically has experience of dealing with many more workers than a worker has experience of employers. Part of being a professional is to be skilled in getting the other party to agree to terms favourable to you but not them. The state needs to step in to influence what is allowable and what is not.

The monopsony power of employers needs to be taken seriously. It has been neglected for too long, but we need to do something about it.

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Note: The post gives the views of its authors, not the position USAPP– American Politics and Policy, nor of the London School of Economics.

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About the authors

alan-manningAlan ManningLSE Economics
Alan Manning is professor of economics at LSE’s department of economics and director of the community programme at the Centre for Economic Performance. His research generally covers labour markets, with a focus on imperfect competition (monopsony), minimum wages, job polarisation, immigration, and gender. On immigration, his interests expand beyond the economy to issues such as social housing, minority groups, and identity. Alan holds a DPhil in Economics from Oxford University. For more on his work, visit his personal website.