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On the Realism of Monopsonized Labor Markets

Wednesday, November 30, 2016 12:01
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(Don Boudreaux)

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This comment by Sub Specie/Æternitatis (on this excellent Steve Landsburg post) deserves additional exposure.  I paste it below in full (emphasis added):

What you [another commenter on Steve’s post] are proposing here is generally labeled the monopsonistic labor market hypothesis. And there is no theoretical reason why it could not possibly be true in some logically-consistent world.

But it is so vastly contrary to everything we actually know about the market for unskilled labor in this universe, that citing it is more of a theoretical fig leaf than a plausible explanation.

Anti-trust lawyers and economists have a fair amount of experience of what conditions it takes to make a market become sufficiently competitive as to achieve price outcomes within a narrow band around the theoretical perfectly competitive market. Among the most important criteria are number of independent competitors, the differentiability of the product, the ease of entry into the market, and the lack of competitive transparency.

By any of these criteria, you’d predict the market for unskilled labor to be very close to perfectly competitive. The product (here, unskilled labor) is very undifferentiated. There are within easy commuting distance from almost every unskilled worker, dozens or even hundreds of potential employers. Entering the market (e.g., opening a fast food franchise) is among the easier ways to start or expand a business. Finally, unskilled labor wages are not centrally reported, leaving every employer in some doubt about the conduct of others.

If despite all of these factors, the unskilled labor market was still non-competitive, you might as well give up on markets entirely. Surely there is no labor market which is more competitive. Surely, lawyers, bankers, and economists face a much less competitive market for their services and must hence be vastly more undercompensated than unskilled workers.

But before you accept that conclusion, just put into mind what the unskilled labor employment monopsony thesis implies. Under it, every single employer could increase their own profits by covertly paying additional salary or benefits to unskilled labor, but all refrain from solidarity with a hard-to-monitor conspiracy of thousands of other such employers!

And what loyalty! Apparently even franchisees under threat of going out of business refrain from resorting to the easy money-making opportunity of increasing wages (as posited by the monopsony hypothesis) just so that they’d avoid nasty looks at the next local Chamber of Commerce meeting. Do failing fast food franchisees really tell themselves that this would be a worse fate than losing their business? It seems fantastical, but if you accept (a) the unskilled labor employer monopsony hypothesis and (b) that some of these regularly go out of business, then you must also accept this fantastical conclusion.

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