What monopsony power in the labor market looks like By Scott Sumner

In previous comment sections, I’ve seen a lot of confusion over the concept of “monopsony power”, which means the buyer can influence the price of what they buy. It is the buyer side equivalent of sellers having “monopoly power”.

Many people seem to assume that only monopolies have monopoly power. Not so, most firms do. If your firm can raise prices by one penny without seeing sales drop to zero, then you have monopoly power. And if you can reduce wages by one penny per hour without losing all your employees, then you have monopsony power in the labor market.

That’s not to say perfect competition is not a useful model, it’s is a good approximation of reality in some contexts. But it’s becoming increasing clear that monopsony power is more than a minor characteristic of the labor market, it gets to the heart of the current issue of labor shortages.

Rick Newman of Yahoo.com did what I’ve been calling on reporters to do, in depth interviewing to see what a “labor shortage” involves. He decided to interview a small manufacturing firm in Indiana, to get a sense of how there could be a shortage of labor. I’d encourage you to read the entire piece, as it beautifully describes what a labor shortage feels like from an employer’s perspective, when they have monopsony power:

And you’ve had a hard time finding workers lately? The unemployment rate in my area is about 2%. [Indiana’s unemployment rate is 3.6%, lower than the national rate, now at 4.3%.] We’ve struggled to hire office staff, entry-level, skilled and highly skilled employees. Almost every business owner around here is struggling to find help. Help wanted signs are posted throughout the community. We have three key positions open right now, which amounts to almost 10% of our workforce.

So this is not typical of America, it’s a really, really tight labor market.

Are you paying more these days? We have been paying more. Starting wages have gone up 20% to 30% in the last three years. At the entry-level, we’ve had to raise starting pay from $11 per hour to over $13 per hour. That’s for somebody with little to no applicable skills, in need of significant training. For skilled workers, pay has gone from $14 or $15 to $18 to $20, and highly skilled, even higher.

That’s also atypical; at the national level wages are rising less rapidly.

Our readers raise a reasonable question: Why don’t you pay even more to get the people you need? We will as long as it makes sense. If there was a direct correlation between the amount you pay somebody and the amount you’re able to get as an output, including loyalty and dedication, simply paying more would be a no brainer, but business isn’t just binary. Some businesses have price inelasticity, high fixed expenses and tight margins, and raising wages too quickly could greatly affect the company’s ability to turn a profit. You can’t just say, I’m going to raise labor costs without considering all the other variables that impact the business. . . . What kind of workers are hard to find? Right now in our area, all kinds, at all wages. We have struggled to find people from the front to the back of the business. Office workers, service workers, trades people, general labor, engineers, sales people. . . . Getting people to show up is as important as getting people with skills. If you’re absent, chronically missing work or always late, you are not protecting your job or concerned with your future at the company. It’s hard to want to help those people. When the unemployment rate is under 2%, the people who are responsible, really good, valuable, are taken, so you have to figure out how to attract good workers from other companies. Many business owners and HR folks I have talked to feel there is a lack of dedication in the available workforce. I do see where some workers could say the same thing about employers. I know using temp agencies for extended lengths of time is rather popular right now.

That’s what monopsony seems like from an employer’s perspective.

As an aside, manufacturing is no longer concentrated in the old rust belt. Iowa is more of a manufacturing state than Ohio, and Nebraska and South Dakota are more manufacturing intensive than Pennsylvania. Here are the top five states, in terms of share of the workforce in manufacturing:

Indiana has 3.6% unemployment, Wisconsin has 3.2%, and Iowa has 3.1%. That’s the job market in America’s most manufacturing-oriented regions.

Now I’d like to see a reporter interview unemployed workers in these three states, to get a sense of why they cannot find jobs. Maybe sit them in a room with a few employers, and try to get to the bottom of this issue.

Update: Rick Newman has another piece that explains why many workers are reluctant to move for a new job—distrust of companies who may later outsource their job overseas.