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  • Writer's pictureOren Levin-Waldman

Labor Monopsony and the Need to Resurrect Labor Market Institutions

Over the last few decades we have seen a tendency in many cases not to enforce anti-trust laws, which were designed to break up monopolies in restraint of free trade. The argument has been that the development of big box stores and/or chains, even if it does reduce competition in the marketplace, has often redounded to the benefit of consumers in the form of lower prices. What hasn’t received nearly as much attention is that the failure to enforce anti-trust laws has also effectively suppressed wages through the creation of labor monopsonies.

A monopoly, of course, is a single seller who because it is the principal seller, if not the only seller, can effectively raise its prices, thereby engaging in price gouging. In An Inquiry into the Wealth of Nations, Adam Smith famously argued that one of the proper functions of government would indeed be to break up monopolies in order to preserve a competitive marketplace. It was, after all, through the invisible hand of competition that the market would be regulated in such a way that the public interest would be served.

Smith argued that producers and sellers wouldn’t attempt to overcharge for their goods, or even sell shoddy goods, because in a competitive marketplace consumers could effectively punish such producers and sellers by buying elsewhere. And yet, monopolies would be a natural outgrowth of free markets whereby big firms could always buy up small firms. Therefore, the state would need, through anti-trust laws, to break up monopolies in order to safeguard free markets.

The focus of anti-trust enforcement has changed on the basis of consumer benefit. If big chains effectively put mom-and-pop operations out of business because their economies of scale will mean lower prices, the consumer is said to benefit. There is still sufficient competition with other chains to keep prices down. And what we have seen in recent years is that stores like Walmart attempt to lower prices even further by forcing suppliers to reduce labor costs.

The other side of the coin that has all but been ignored is that these monopolies have effectively become labor monopsonies. A monopsony is the single largest purchaser of labor. A classic example of this would be the one company town where that one company is the main employer and therefore can control wages. Because there is no other employer, workers are forced to accept whatever wages are offered because there is no real competition.

It is precisely because the fast food industry, for instance, is a labor monopsony that a minimum wage increase may actually result in no real adverse employment consequences. The fast-food industry is said to be the largest employer of minimum wage workers. Therefore, raising the minimum wage will not adversely affect them. In their famous studies of the fast-food industry, David Card and Alan Krueger in the 1990s found that increased minimum wages actually resulted in increased employment.

What, then, is the result of monopsony on the labor market generally? If there are fewer firms vying against one another for workers, wages are bound to be lower. A monopsony occurs when employers are able to exploit labor market conditions and pay their workers less than the value of their contribution. If there are fewer firms because of lax anti-trust law enforcement, then the effect is to suppress wages. So what happened to the standard argument of competitive market theory that workers freely negotiate their wages and working conditions with their employers?

It has long been assumed that in the real word where employers have market power that the only real negotiation that takes place is “take-it-or-leave-it.” That is, there is no real negotiation; the employees either accepts or rejects it. But where employers enjoy monopsony power, workers may have no real alternative but to accept even miserable wages because there are no other employers to offer higher wages.

What, then, is the sum total of all this? Big chains have become effective monopolies in restraint of free trade, which in this case is merely the absence of real competition, not because they ate up smaller operations, but because their lower prices due to economies of scale drove the competition out of business. But as a result, they also acquired monopsony power in the labor market, which effectively drove down wages.

None, of this, however, necessarily militates against the claim that more skilled workers are in a better position to negotiate for better wages because they have skills which employers need. But monopsonies are said to exist in say hospital systems, which in the last couple of decades, have been buying up medical practices. They are in a better position to control the wages of nurses who definitely fall into the ranks of skilled workers. So as more monopsony power is lodged in the hands of ever expanding multinational corporations, and even high-tech firms, it isn’t hard to see how the wages of those at the top of the distribution could similarly be suppressed.

How, then, can we protect workers’ wages. One possibility might be to turn anti-trust laws towards labor monopsonies so that there might be more competition for workers’ labor. One idea, put forth by law professor John Litwinski, might even be to break up monopsonies while outlawing unions. It isn’t clear, however, whether breaking up monopsonies would provide immediate relief to workers. Another possibility, and one conceded by neoclassical economists steeped in the theory of competitive market theory, is to give workers market power.

This, of course, can be done by strengthening labor market institutions like unions and minimum wages. The argument against them has long been that they artificially inflate wages beyond the worth of the workers. And yet monopsonies may also suppress wages below the worth of workers. That is, once it is recognized that there are labor monopsonies that effectively suppress wages, it is also recognized that there really is no such thing as natural markets, as the neoclassical model holds.

On the contrary, it is about who has power and that employers have always had more power in the marketplace. A monopsony only underscores how much power they have. Labor market institutions, then, are not about artificially inflating wages as critics so often claim, but about giving workers a measure of power they otherwise lack. Even Adam Smith recognized that workers might need to organize as employers might collude to drive down wages.

Perhaps it is no coincidence that the labor monopsinies that have developed in recent decades are part of the larger forces of globalization that have resulted in massive economic dislocation, low wages, and rising inequality. Capital flight in search of lower wages have no doubt lowered workers’ wages and hollowed out the middle class. The labor monopsonies that have formed, due to the bigness that has enabled many to remain competitive on a global scale, have only reinforced a regime of low wages. The only defense that workers have is to resurrect traditional labor market institutions, and to do so in the name of a level playing field.

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