Last week I testified at the House Select Committee on Economic Disparity and Fairness in Growth about the idea of monopsony and monopoly power (you can watch the event and read my testimony here and here).

Democratic witnesses and politicians claimed that the U.S. is plagued both by highly concentrated labor markets in many regions and by highly concentrated product industries, which each grant companies the market power to suppress wages for American workers and raise prices for consumers respectively. Indeed, highly concentrated industries were even blamed by some witnesses for a large component of our current bout of inflation.

To counteract these trends, my fellow witnesses championed more stringent enforcement of antitrust laws in labor and product markets, higher minimum wages, and new federal laws facilitating easier unionization for workers. I was left bemused by the economics of much of the discussion.

MONOPSONY

Monopsony is the flipside of monopoly—the idea of a single buyer in a market, rather than a single seller. Far from being competitive, it was alleged during the hearing that a large minority of Americans live in labor markets where firms have a significant dose of monopsonistic power, which allows them to pay workers less than their productive value in a perfectly competitive market.

Is there any evidence for this idea? One witness cited results found in Azar et al’s “Concentration in U.S. Labor Markets: Evidence From Online Vacancy Data.” The authors of that paper use data from the number of online job adverts and the salaries on postings to calculate the labor market concentration of different industries divvied up by U.S. commuting zones. They purport to show that 60 percent of these geographic-occupational specific labor markets are highly concentrated. This covers 20 percent of American workers, most of whom are in rural areas. They then correlate concentration with wages, suggesting that more concentrated markets see lower pay.

Economists have long known not to use concentration measures as if they are synonymous with the level of competition in a market. Studies using this methodology have particularly significant flaws. As supposed evidence of damaging monopsony power:

• They assume local workers cannot substitute between different industries and skills. However, a non-specialized retail worker could clearly substitute into the food services industry, or even many manufacturing roles.
• The studies risk ignoring or failing to control for confounding factors that explain why rural areas have both higher concentration and lower wages than urban areas. Of course, higher living costs and the benefits of agglomeration economies both disproportionately impact urban zones, which can raise reservation wages and productivity levels (and so wages).
• The data is limited by using online job ads as proxies for job availability. Rural areas often have labor markets where opportunities spread through word of mouth.

Undeterred by these concerns, Democratic witnesses argued that this supposed evidence of monopsony power justifies substantially raising minimum wages, passing more permissive trade union legislation, and enforcing antitrust laws on labor markets. If these policies offset monopsony power towards outcomes seen in a perfectly competitive market, then they should theoretically be able to raise both wages AND employment, they said.

In my testimony I argued that holding U.S. labor markets to the standard of the perfectly competitive model in economics textbooks was foolish. Markets might not be perfect, but it is wishful thinking to presume that labor markets are perfectible by governments. Much of the other evidence for monopsony power (usually measures showing workers aren’t fully responsive to changes in wages, in terms of moving jobs) could simply reflect reasonable job matching or employees liking their jobs due to other non-remunerative benefits, such as work friendships, short commutes, or remote work flexibility. What’s more, there is no empirical evidence suggesting the policies advocated can be carefully set to exactly counteract monopsony power, providing the free lunch of higher employment and higher pay.

Only 6 percent of recent empirical studies on state minimum wage hikes conclude that they actually raised employment (against 80 percent that find negative effects), and a swath of other research shows that unionization tends to reduce job growth within firms. Neither of these findings suggest policymakers can offset monopsony power without damaging consequences. That minimum wage finding, in particular, is not surprising: lower skilled workers, if anything, are likely to have more job options and so “market power” over employers than those workers whose roles are highly specialized and company specific.

The argument for antitrust applied to labor markets is more baffling still. Suppose a local town really did have one dominant monopsony employer in the production of a globally competitive heavy manufacturing product. Should the factory be broken up because of its local labor market power? This might risk the company moving the venture overseas or becoming cost uncompetitive in the product market, resulting in even more job loss. Indeed, basic economics tells us that in cases where businesses operate in competitive product markets, or even monopsonistic product markets where they can wage discriminate between individual employees, higher minimum wages or unionization policies would still harm employment numbers.

Rather than introducing intrusive new economic policies based on such shaky theory and data, I argued that politicians concerned about worker welfare would be better off focusing on removing government-imposed barriers to job or geographic mobility (occupational licensing laws, zoning and urban growth boundaries), or entry barriers in product markets (tariffs on food and inputs).

It isn’t a shock that the most convincing examples of these studies on monopsony happen to be in healthcare, where entry regulations and licensing can interact to give hospitals substantial market power. Current policies that make it more difficult for workers to move or hinder competition for labor seem like low hanging fruit if you care about the possibility of employer market power. Certainly, they are less risky than high minimum wages or permissive union laws being applied to the whole population.

Stayed tuned for part two on “Monopoly power” in the U.S. tomorrow.