The Rise of the Monopsony

Some economists argue that monopsony power is a reason why wage growth and inflation have remained stubbornly low. Others believe that “slackers” should be considered.

The Phillips Curve tells us that there is an inverse relationship between inflation and unemployment. When unemployment falls, workers’ bargaining power increases, forcing companies’ HR departments to set higher wages to make workers work efficiently, which, in turn, causes prices to rise as firms want to retain profit margins, that is to say inflation occurs. This theory suggests that there is a relationship between the level of unemployment in an economy and the rate of wage growth. But as Isabel O’Brien highlighted in an article for the Quarterly few weeks ago, the relationship between unemployment and inflation has largely broken down since the Great Recession with many famous economists bidding the Phillips Curve farewell. What does this tell us about wages? Some economists believe that a lack of wage growth in times of low unemployment murdered the Phillips Curve. In other words, workers’ bargaining power, which provokes wage growth and inflation in the Phillips Curve relationship, seem not to be very powerful. Let’s get a clear picture of the data and see why wages aren’t growing.

The Lack of Wage Growth

The Phillips’ Curve is based on the notion that an increase in workers’ bargaining power due to a fall in unemployment should cause firms to bump-up wages, but this relationship seems to have disappeared after the 2008 crisis. Indeed, this is clear for the US economy highlighted in Figure 1, in which wage growth (blue) is measured on the left axis and the unemployment rate (red) on the right axis, with the vertical arrow highlighting the widening gap.

Figure 1

The United States’ current unemployment rate at 4% suggests that the US economy should be operating at a near natural level of unemployment,[1] yet we see wages remain unresponsive. Why is it that this low unemployment hasn’t increased workers’ bargaining power, failing to fire up under wage growth? This is a question that keeps many economists up at night, and throughout the past few years economists have come to identify a few plausible causes.

More Slackers Than Unemployed

Some economists have argued that the official unemployment rate, which only counts people actively looking for work, has become an increasingly inaccurate reflection of the actual state of labor markets. To them, unemployment may not be as low as our current estimates suggest. Instead, these economists believe that there is substantial “slack” in the economy. Workers who “slack” are not only those who are actively looking for work but those who are merely inactive as well. There are two primary elements to slack: Firstly, underemployment which encompasses people working part-time and who want a full-time job, and, secondly, hidden unemployment which includes people who are not actively searching for a job due to any form of discouragement, perhaps due to a belief that the job market isn’t strong enough.[2]

American Economist Ernie Tedeschi argues that if we look at the fraction of 25-54 year-old adults currently working relative to the entire population –  a measurement called the Employment to Population Ratio (EPOP) – as an indicator of “slack” in the economy, we see that employment rate has not returned to 2001 levels like the unemployment rate has.[3] This is clear in Figure 2 in which EPOP is blue and unemployment rate is red and where the gap between the two is illustrated by the vertical arrow.

Figure 2

So slack is high in the US economy and the unemployment rate does not take that into account. But what does this mean to wage growth? The observation of slack has created a notion of two types of labour markets. A tight labour market is one in which demand for labour is at least as strong as supply – in other words, one in which employers compete for workers. The tight labour market is therefore generally one in which employees’ bargaining power on wages is stronger. A slack labour market is one in which the existence of labour reserve – large slack – gives employers more bargaining power, potentially pushing down wages.[4] The presence of slack could explain why wage growth has not occurred despite what looks like a very low unemployment rate.

But recently, Paul Krugman dismissed the idea of slack being an important cause of stagnating wage growth. In his New York Times column, he argues that the “quits rate” – the fraction of workers quitting their jobs each month – is at pre-crisis levels and, since workers are more willing to quit if they are confident that they can find another job – that is to say their bargaining power is strong – this indicates that the labour-market is in fact rather tight. In the same piece, Krugman also highlights surveys on how easily firms can find workers and, as they reflect many labour shortages, worker’s bargaining power should not be low because of slack.[5]

So, what is it that has hampered workers bargaining power in the past decade? For the past year, the focus has been on an old enemy; the monopsony.

The Monopsony is Back in Town

Many economists now argue that an old enemy of workers has returned. Most SciencesPo students are familiar with the notion of a monopoly, in which one seller dominates an entire market, pushing up prices. In a monopsony, one buyer dominates the entire market, causing prices to fall. To understand how this works, we have drawn this monopsonistic labour market graph. The marginal revenue product curve here represents the marginal revenue brought to a firm by hiring an additional worker, and the marginal cost curve illustrates the marginal cost of labor to a firm. Additionally, the supply curve is upward-sloping because to attract more workers the firm needs to raise wages. Now, basic microeconomic theory tells us that a firm profit-maximizes where marginal revenue product is equal to marginal cost, that is to say at point A. By choosing point A, the wage is determined at point C on the labor supply curve. In this case, the wage, W, is lower than it would have been at the competitive labor market equilibrium of B, W+, where the supply of labor equals demand (marginal revenue product). In other words, the presence of a single buyer having market power over sellers, causes a downwards pressure on prices, or in our case, wages.

In a recently published paper, a proposal for protecting low-income workers from monopsony and collusion, Alan Krueger of Princeton University argues that the return of the monopsony provides a partial explanation as to why wage growth has remained low.[6] To Krueger, monopsony power in the labour market today emerges from primarily two forms of contractual practices.

The first type of legal contract Krueger investigates is Non-Compete Agreements (Let’s call them NCAs) which is a clause under which an employee agrees not to enter into or start a similar profession or trade in competition against another employer. In 2014, uncovered documents published in The New Republic, proved that in 2005 Apple, Google, Intel, Adobe, Intuit, and Pixar colluded to push down their workers’ wages through NCAs. They agreed to not recruit employees from each other, they shared wage scales, and they made sure to enforce this agreement with each other. Additionally, in 2014 it was revealed that Jimmy John’s, a fastfood franchise, required low-level employees to sign contracts with non-competes that prohibited them from taking jobs at any business that obtained more than 10 percent of its revenue from “selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches” within two (later extended to three) miles of any franchise, anywhere in the United States.[8] Concerning the legality of these contracts, in U.S common law, courts make an exception to the principle of freedom of contract and refuse to enforce NCAs that are “unreasonable.” This means that while NCAs can be challenged under the antitrust laws, defendants can often avoid liability by showing that the NCAs serve a reasonable business purpose. [9] TO Krueger, when NCAs are not found to be illegal, the economic effect is a downwards pressure on wages by means of monoponistic power.

Another illustration of monopsony power can be found in No-Poaching Agreements (NPAs). NPAs take form when a single franchisor enters an agreement with each individual franchisee under which the franchisee promises the franchisor that it will not poach employees from other franchisees or company-owned units. In 2017, employees of McDonald’s sued the company under the antitrust laws for subjecting its franchisees to a no-poaching arrangement. Since at least 1987 until early in 2017, McDonald’s has included a no-poaching clause in its standard franchise.[10] Kruger points out that if more than one franchisee exists in a single labor market, and those franchisees are collectively a dominant employer in that labor market, the no-poaching agreement is anticompetitive, and will tend to suppress the wages of workers. Are they legal? Well, when firms are independent, NPAs are clear violations of antitrust law. However, as Krueger argues, NPAs within franchises remain fairly common and have grown in usage in practice as the law only ambiguously determines which types of NPAs are illegal.

From Alan Krueger’s evidence it becomes clear that monopsonies are back in the United States, and workers hoping for stronger bargaining power and higher wages as the economy grows should fear it.

How do we strengthen bargaining power?

Monopsony power provides a reasonable explanation for how workers’ bargaining power has diminished, leading to low wage growth and low inflation in the United States. Slack is likely to also have weakened the bargaining power of workers with similar consequence, but not all economists agree that sufficient slack is present to prevent wage growth. But what do policy makers need to do to boost wage growth?

Again, we return to Alan Krueger, who in his paper, highlights several paths policymakers can take. To improve workers’ bargaining power, lawmakers should ban No-Poaching Agreements; invest in public infrastructure, which can increase the size of labor markets by reducing commute times; increase the quality of education and promote unions.[11] Historically, labor unions played a greater role in counterbalancing monopsony power in labour markets, but with only 7 percent of private sector workers unionized in the U.S., unions play a much smaller role today.[7] Yet, the best way to kick-start wage growth is a topic of intense debate among economists and, since there is still no consensus on the causes on stagnating wage growth, the solutions remain unclear.

[1] Tedeschi, E. (2018). Unemployment Looks Like 2000 Again. But Wage Growth Doesn’t.. [online] Available at: [Accessed 20 Feb. 2019].

[2] Jain, S. (2016). Market Realist. [online] Available at: [Accessed 8 Feb. 2019].

[3] Tedeschi, E. (2018). Unemployment Looks Like 2000 Again. But Wage Growth Doesn’t.. [online] Available at: [Accessed 8 Feb. 2019].

[4] ILR School, C. (2017). Estimating labour market slack in the European Union. [online] Available at: [Accessed 9 Feb. 2019].

[5] Krugman, P. (2018). Opinion | Monopsony, Rigidity, and the Wage Puzzle (Wonkish). [online] Available at: [Accessed 11 Feb. 2019].

[6] Krueger, A. (2018). A proposal for protecting low-income workers from monopsony and collusion. [online] Brookings. Available at: [Accessed 11 Feb. 2019].

[7] Krueger, A. (2018). A proposal for protecting low-income workers from monopsony and collusion. [online] Brookings. Available at: [Accessed 11 Feb. 2019].

[8] Wiessner, D. (2016). Jimmy John’s settles Illinois lawsuit over non-compete agreements. [online] U.S. Available at: [Accessed 15 Feb. 2019].

[9] Krueger, A. (2018). A proposal for protecting low-income workers from monopsony and collusion. [online] Brookings. Available at: [Accessed 20 Feb. 2019].

[10] Krueger, A. (2018). A proposal for protecting low-income workers from monopsony and collusion. [online] Brookings. Available at: [Accessed 16 Feb. 2019].

[11] Krueger, A. (2018). A proposal for protecting low-income workers from monopsony and collusion. [online] Brookings. Available at: [Accessed 18 Feb. 2019].

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