On Monopsony and Legal Surroundings

By Vincent Geloso.

"A few days ago, in reply to this December NBER study, David Henderson at EconLog questioned the idea that labor market monopsonies matter to explain sluggish wage growth and rising wage inequality. Like David, I am skeptical of this argument. However, I am skeptical for different reasons.
First, let’s point out that the reasoning behind this story is well established (see notably the work of Alan Manning). Firms with market power over a more or less homogeneous labor force which must assume a disproportionate amount of search costs have every incentive to depress wages. This can lead to reductions in growth as, notably, it discourages human capital formation (see these two papers here and here as examples). As such, I am not as skeptical of “monopsony” as an argument.

However, I am skeptical of “monopsony” as an argument. Well, what I mean is that I am skeptical of considering monopsony without any qualifications regarding institutions. The key condition to an effective monopsony is the existence of barriers (natural and/or legal to mobility). As soon as it is relatively easy to leave a small city for another city, then even a city with a single-employer will have little ability to exert his “market power” (Note: I really hate that word). If you think about it simply through these lenses, then all that matters is the ability to move. All you need to care about are the barriers (legal and/or natural) to mobility (i.e. the chance to defect).

And here’s the thing. I don’t think that natural barriers are a big deal. For example, Price Fishback found that the “company towns” im the 19th century were hardly monopsonies (see here, here, here and here). If natural barriers were not a big deal, they are certainly not a big deal today. As such, I think the action is largely legal. My favorite example is the set of laws adopted following the Emancipation of slaves in the United States which limited the mobility (by limiting the chances of Northerners hiring agents to come who would act as headhunters in the South). That is a legal barrier (see here and here). I am also making that argument regarding the institution of seigneurial tenure in Canada in a working paper that I am reorganizing (see here).

What about today? The best example are housing restrictions? Well, housing construction and zoning regulations basically make the supply of housing quite inelastic. The areas where these regulations are the most severe are also, incidentally, high productivity areas. This has two effects on mobility. The first is that low-productivity workers in low-productivity areas cannot easily afford to move to the high-productivity area. As such, you are reducing their options of defection and increasing the likelihood that they will not look. You are also reducing the pool of places to apply which means that, in order to find a more remunerative job, they must search longer and harder (i.e. you are increasing their search costs). The second effect is that you are also tying workers to the areas they are in. True, they gain because the productivity becomes capitalized in the potential rent from selling any property they own. However, they are in essence tied to the place. As such, they can be more easily mistreated by employers.

These are only examples. I am sure I could extend the list to reach the size of the fiscal code (well, maybe not that much). The point is that “monopsony” (to the extent that it exists) is merely a symptom of other policies that either increase search costs for workers or reduce the number of options for defections. And I do not care much for analyzing symptoms."

Here is the post from Henderson

"David R. Henderson, an economist at the conservative Hoover Institution, said the existence of additional options outside a worker's current occupation or city made him skeptical that concentration was having an effect on wages. Skilled workers, he said, can seek out opportunities in other cities. Less-skilled workers can change occupations relatively easily. "Because they're unskilled, they fit in many kinds of jobs, and so you have more employers at the local level," Mr. Henderson said.
Some manufacturing industries, like breakfast cereal and tobacco, are even more concentrated than farm equipment. But since many workers in those businesses are less skilled than farm-equipment mechanics, they may be more interchangeable with workers in other industries.
To the extent that less-urban areas have a problem, Mr. Henderson added, policymakers should make it easier for people to move to cities where there are more opportunities, perhaps by easing building restrictions that drive up housing prices. That suggestion was also raised in a report on employers' market power by President Barack Obama's Council of Economic Advisers.

This is from Noam Scheiber and Ben Casselman, "Why Is Pay Lagging? Maybe Too Many Mergers in the Heartland," New York Times, January 25, 2018. (Print edition is January 26.)

 Because of my 4-part series on monopsony in labor markets in October 2016 in which I dissected a report from President Obama's Council of Economic Advisers, Ben Casselman reached out to me to ask my thoughts on José Azar, Ioana Marinescu, and Marshall I. Steinbaum, "Labor Market Concentration," NBER, December 2017. The ungated version is here.

I took some time to read it and spoke to him the next day. I'm very pleased that he quoted me accurately.
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Ben left out one major criticism (I'm not blaming him--as long as he quotes me accurately and doesn't take me out of context, it's good). To measure concentration, the authors used data from CareerBuilder.com. What's wrong with that? Here's the extreme example I gave Ben. Let's say that you have 1,000 employers of a particular kind of labor in one area. What if only 2 of them are hiring? Then the data from Azar et al will show a highly concentrated market. Ben told me that he had wondered about that too and had asked Azar. Azar had answered that that's not a problem because if only 2 firms are hiring, that's what's relevant to job seekers. I told him I didn't think that was a good answer: the worker has 998 more potential employers and the odds are that some of them, within a few months, will be hiring.

I've thought about it more since then. I think my point is even stronger. Let's say that none of them is hiring in the next few months. It's still the case that there's potential competition among employers for workers. It's hard to believe that the wage would be much lower because only 2 firms are hiring if there are 998 other employers of the same type of labor."