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Monopsony in Motion

Monopsony in Motion: Imperfect Competition in Labor Markets

Alan Manning
Copyright Date: 2003
Pages: 416
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  • Book Info
    Monopsony in Motion
    Book Description:

    What happens if an employer cuts wages by one cent? Much of labor economics is built on the assumption that all the workers will quit immediately. Here, Alan Manning mounts a systematic challenge to the standard model of perfect competition.Monopsony in Motionstands apart by analyzing labor markets from the real-world perspective that employers have significant market (or monopsony) power over their workers. Arguing that this power derives from frictions in the labor market that make it time-consuming and costly for workers to change jobs, Manning re-examines much of labor economics based on this alternative and equally plausible assumption.

    The book addresses the theoretical implications of monopsony and presents a wealth of empirical evidence. Our understanding of the distribution of wages, unemployment, and human capital can all be improved by recognizing that employers have some monopsony power over their workers. Also considered are policy issues including the minimum wage, equal pay legislation, and caps on working hours. In a monopsonistic labor market, concludes Manning, the "free" market can no longer be sustained as an ideal and labor economists need to be more open-minded in their evaluation of labor market policies.Monopsony in Motionwill represent for some a new fundamental text in the advanced study of labor economics, and for others, an invaluable alternative perspective that henceforth must be taken into account in any serious consideration of the subject.

    eISBN: 978-1-4008-5067-9
    Subjects: Business, Economics, Political Science

Table of Contents


    • 1 Introduction
      (pp. 3-28)

      What happens if an employer cuts the wage it pays its workers by one cent? Much of labor economics is built on the assumption that all existing workers immediately leave the firm as that is the implication of the assumption of perfect competition in the labor market. In such a situation an employer faces a market wage for each type of labor determined by forces beyond its control at which any number of these workers can be hired but any attempt to pay a lower wage will result in the complete inability to hire any of them at all. The...

    • 2 Simple Models of Monopsony and Oligopsony
      (pp. 29-55)

      This chapter introduces some simple models of monopsony and oligopsony which form the foundation for the analysis in the rest of the book. The first three sections present some partial equilibrium models: the textbook static model of monopsony, a simple model of dynamic monopsony, and what is called a generalized model of monopsony where the firm has instruments other than the wage to influence the flow of recruits. The fourth section then presents a general equilibrium model of dynamic oligopsony (based on a simplified version of Burdett and Mortensen, 1998) to show how the framework is a fully coherent vision...

    • 3 Efficiency in Oligopsonistic Labor Markets
      (pp. 56-79)

      Discussions of the partial equilibrium static model of monopsony often emphasize that the free market equilibrium is inefficient in a very particular way. Both the wage and employment are too low and full efficiency can be restored by ensuring that the wage is equal to what it would be in a perfectly competitive labor market. One way of achieving this outcome is by means of an artfully chosen minimum wage. This chapter considers whether general equilibrium models of oligopsony allow such clear-cut policy prescriptions: the conclusion is that they do not, although there is no presumption that the “free market”...

    • 4 The Elasticity of the Labor Supply Curve to an Individual Firm
      (pp. 80-114)

      The single most important idea in this book is that the wage elasticity of the labor supply curve (εNwin the notation of previous chapters) is not infinite or close to it. Hence, the most direct way to establish the existence of employer market power over its workers is to estimate the wage elasticity of the labor supply curve facing the firm. Studies of this elasticity are few and far between: one might cite Reynolds (1946a), Nelson (1973), Sullivan (1989), Machin et al. (1993), Boal (1995), Beck et al. (1998), Staiger et al. (1999), and Falch (2001) as an almost...


    • 5 The Wage Policies of Employers
      (pp. 117-140)

      To maximize profits employers would like to obtain workers at the lowest possible cost. In the models used in previous chapters, employers were constrained to set a single wage for all their workers. The choice of this wage forces the employer to trade off the number of workers (the higher the wage the easier is recruitment and retention of workers) against the profit per worker (the higher the wage the higher are labor costs). The employer ends up paying some workers more than it needs to recruit them and misses out on the recruitment and retention of other workers it...

    • 6 Earnings and the Life Cycle
      (pp. 141-192)

      Since at least the work of Mincer (1962, 1974) earnings functions have been an essential part of the toolbox of labor economists. These earnings functions are typically cross-section regressions of some measure of the wage or earnings on worker characteristics such as experience, job tenure, education and training, sex, race (even beauty and sexual orientation), and employer characteristics (for a survey, see Polachek and Siebert 1992). Estimating the returns to education, the extent of discrimination and diagnoses of the causes of rises in wage inequality are just some of the uses to which earnings functions have been put. The relationship...

    • 7 Gender Discrimination in Labor Markets
      (pp. 193-216)

      Labor market discrimination is usually defined as a situation where workers who are identical in ability have different labor market outcomes. It should not come as a surprise that monopsony or oligopsony has something to say on these issues as, in such a labor market, we know that wages are determined by factors other than productivity. But, this wage dispersion is not quite what is commonly meant by discrimination, a phrase that is generally reserved for a situation where certain groups, for example, women or ethnic minorities systematically receive worse treatment from the labor market. While the disadvantages suffered by...

    • 8 Employers and Wages
      (pp. 217-236)

      In a competitive labor market, wages should, after controlling for other relevant characteristics of the worker, only be related to employer and job characteristics to the extent that they affect the non-pecuniary aspects of the job. That is, the only wage variation associated with employers should be compensating wage differentials.

      One of the “puzzles” of the observed structure of wages is that wages are correlated with a whole range of employer characteristics (for a survey of this, see Groshen 1991a). One might single out the following:

      industry affiliation (e.g., Krueger and Summers 1988; Gibbons and Katz 1992);

      employer size (e.g.,...


    • 9 Unemployment, Inactivity, and Labor Supply
      (pp. 239-268)

      This chapter discusses the determinants of the level and structure of non-employment. In a frictionless, perfectly competitive labor market, workers are out of work whenever the utility they could obtain in the market is below the utility obtainable when out of it. In most discussions, however, allowance is made for some frictional component to unemployment.¹ Perhaps the most celebrated statement of this is Friedman (1968: 8)

      the natural rate of unemployment is the level … that would be ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual structural characteristics of the...

    • 10 Vacancies and the Demand for Labor
      (pp. 269-300)

      The previous chapter considered the role of workers’ actions in influencing labor market transition rates and, hence, employment, unemployment, and inactivity rates. This chapter considers how the actions of employers affect the same variables. The main way in which firms can influence the arrival rate of job offers is by creating vacancies and spending resources in trying to fill them, and the main way in which they can influence the separation rate is by the lay-off decision.

      Part of this chapter is concerned with the choice of recruitment intensity by firms. One way of thinking about this extra choice is...

    • 11 Human Capital and Training
      (pp. 301-322)

      This chapter discusses the economics of human capital acquisition and training. There is a well-established, competitive market approach to this subject perhaps best represented by Becker’s classic bookHuman Capital(Becker 1993). Becker’s book is justly famous for its distinction between general human capital (skills that are perfectly transferable between employers) and specific human capital (skills of use to only one employer). Becker argued that workers will bear the cost of investment in general human capital as competition among employers will ensure that the wage is always equal to the marginal product so that workers will appropriate all the returns...


    • 12 The Minimum Wage and Trade Unions
      (pp. 325-359)

      Previous chapters have assumed that employers can freely choose wages. Of course, the choice of the wage will be influenced by what is happening in the rest of the labor market but there are no external constraints on the wage that can be chosen. However, there are often restrictions on the wages that employers can pay and this chapter is about two of these constraints: the minimum wage and trade unions.

      The textbook competitive analyses of minimum wages and trade unions are very similar, if not identical. Both institutions are seen as raising wages above the market-clearing level, reducing employment...

    • 13 Monopsony and the Big Picture
      (pp. 360-368)

      The basic idea behind this book is that employers have non-negligible market power over their workers and that our understanding of labor markets would be markedly improved by an explicit recognition of this fact. In many parts of labor economics, a trend in this direction is already visible so this book has brought together existing strands of research as much as it has proposed new ones.

      But, there is still some way to go before this is the conventional approach. Labor economists need to realize that, when considering the actions and decisions of a single employer, one needs to use...