An interesting piece here concerning monopsony in labor markets. OK, let’s revise that “interesting” to carry a specific meaning: of interest to political and economic geeks like myself. But it does have wider implications.

The literal meaning of monopsony is “one buyer” (just as the literal meaning of monopoly is “one seller”). In the context of labor markets, monopsony means one buyer of labor, that is, one employer. But that’s confusing, because these days when economists use the term in the context of labor markets they usually don’t mean one employer.
Here’s what they do mean: in the standard labor market model, known as the perfect competition model, the market as a whole — that is, the supply of labor (all workers seeking a job) and the demand for labor (all jobs being offered by all firms) — determines the wage. The market-clearing wage occurs at that point where labor supply equals labor demand.

Moreover, in the perfect competition model, no single firm has the power to determine the wage; it simply accepts the wage that the market as a whole has determined, and that is what it offers to its workers. In this model, workers are extremely wage-sensitive, so much so that if any single firm cuts wages by even one cent, all the workers at that firm will immediately quit and find employment elsewhere.

In the monopsony model, however, the theory is that the employer has what is known as “market power,” and therefore is not a “wage-taker” (i.e., doesn’t have to offer the market wage). In this model, it is assumed that it’s the employer, not the market, which sets the wage. Therefore, in the monopsony case, the employer will offer below-market wages. And moreover, it’s assumed that the source of the firm’s market power are forces that bind an employee to an employer, so that if wages were cut, at least some of the employees would stay.

As is further explained, this has interesting implications for the gender pay gap. One of the reasons that the firm might have this pricing power is that it offers other, more intangible benefits: time off to care for children perhaps, or part time working, flexible working. And there are studies which show that women value these things more than men and thus that firms hold greater pricing power of the wages of their female workers than they do over men.

This can lead to people arguing (as is indeed done here) that the existence of such monopsonistic power means that greater intervention in the labor markets can be justified: both on equity and efficiency grounds. One example is as discussed here, that perhaps decent day or child care should be made a component of all jobs?

It’s an interesting argument, as far as it goes, but I’m not sure that it actually goes far enough. I don’t think there’s anybody who really believes the model of pure free markets in labor: nor do I think there’s anyone who would argue that there isn’t at least some monopsony power as described here. However, what we really want to know is which model is closer to the truth: models are, after all simplifications to aid us in understanding something complex. I tend to the free markets side, others might not.

But I’m really not certain that even that is the important point. It is, rather, that this allegation (description? accusation?) of monopsony power is I think missing the crucial distinction. From the point of view of the employer, these women friendly policies are not distinct from the wages of the labor being employed: they are very much part and parcel of them. Flexible working, child care, health care, part time jobs, all cost the employer money to provide. That if they spend more on such things then they will pay less in actual cash for the labor seems to me to be obvious. And that women who prefer these benefits to higher cash wages are in fact earning the same amount as the men who prefer the higher cash and fewer benefits. So while we have an apparent monopsony here, the firm with power over labor, I don’t think that we actually do. It’s simply that, in this example, we are assuming that men and women desire a different mixture of rewards for ther time and expertise, while the total reward is equal.

The error comes in from only considering the cash side of the compensation, rather than the total costs and benefits received.

What this then means for the political action is that insisting that the compensation be structured in a “woman friendly” manner is both unfair in equity terms and a bad idea in efficiency terms.

In equity, because the unmarried and or childless will be forced to accept part of their compensation in a form that they do not desire: those child friendly or child care policies, rather than the cash to spend as they wish they would prefer. Further, in efficiency, because it is efficient for both workers and employers to decide upon the mix of compensation offered and accepted.

As you might have gathered by now, I’m not entirely sold on this idea that we have either imperfectly operating labor markets and given that, I’m certainly not sold on the idea that we need to fix them.