The Daily Parker

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Monopsony effects on workers

This morning we in the US got the news that the employment rebound that started under President Obama has continued, giving us the best employment picture in 50 years. Yet at the same time, despite robust wage growth in some places, families still feel squeezed.

The Economist suggests this may come in part from business concentration depressing wages through the same mechanism through which monopsonies increase prices:

In perfectly competitive markets, individual firms wishing to sell their widgets must charge the prevailing market price and no higher. But the situation changes when one or a few firms dominate a market. A monopolist may charge higher prices. The calculation is that consumers, faced with little choice, will buy enough of its offerings at a higher price to yield greater profits. But some sales are lost because of monopoly pricing, which represents a “deadweight loss” to society—a missed opportunity to raise total welfare. Monopolies can also stifle innovation. AT&T, America’s once-mighty telecoms firm, used its dominant position in the operation of local phone networks to overcharge consumers for service and handsets. It took the break-up of the network monopoly to clear the way for falling prices and innovation.

Just as powerful firms may use their clout to overcharge customers, they can also manipulate markets to pay lower wages. In competitive labour markets an individual employer can do little to squeeze pay, because workers can easily find better-paying jobs. But in a “monopsony”, such as a mining town with only one mine, workers have fewer options. Firms can offer wages below the competitive-market rate knowing that many workers will not be able to afford to turn them down. As with monopolies, this exercise of monopsony power boosts profits but saddles society with a deadweight loss—the underemployment of workers—as well as other costs, such as higher spending on state benefits.

To date, governments have been too focused on the harms to customers from increasing industrial concentration. A consideration of the impact on workers is overdue. Without competition, large firms become exploitative bureaucracies that are accountable to no one. Consumers and workers alike deserve better.

Witness Amazon.

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