David Henderson on Monopsony

From https://www.econlib.org/archives/2016/11/the_ceas_mixed_3.html

Free To Choose in Under 2 Minutes Episode 8 – Who Protects the Worker?

Monopsony and @Fightfor15

The Coming Meltdown in Labor Relations

Alan Manning on monopsony


Alan Manning explains monospony


Market concentration doesn’t signal monopsony

Monopsony is overblown

Richard Epstein on labour relations

Alan Manning explains how inserting the language of market power into labour markets doesn’t mean worker exploitation at all


Earl A. Thompson on anomalies in unionisation

Jesus Fernandez-Villaverde on power in the labour market


Milton Friedman – Rights of Workers

Information costs in the labour market

Every worker, even the low-paid worker, is alert to their opportunities and take the best jobs that come to their notice but it is gaps in their information is the sand in the wheels of this search. As Manning (2005) observed in his superb Monopsony in Motion:

That important frictions exist in the labor market seems undeniable: people go to the pub to celebrate when they get a job rather than greeting the news with the shrug of the shoulders that we might expect if labor markets were frictionless. And people go to the pub to drown their sorrows when they lose their job rather than picking up another one straight away. The importance of frictions has been recognized since at least the work of Stigler (1961, 1962) (Manning 2005, p. 4).

The left has a certain view of how the labour market works and how to best move workers into better paying jobs. Standing against this are arguments that it is a want of information rather than weak bargaining power is what slows workers down from moving to a better job. As Stigler (1961, 1962) argued, information is costly to obtain in the labour market:

No worker, unless his degree of specialization is pathological, will ever be able to become informed on the prospective earnings which would be obtained from every one of these potential employers at any given time, let alone keep this information up to date. He faces the problem of how to acquire information on the wage rates, stability of employment, conditions of employment, and other determinants of job choice, and how to keep this information current (Stigler 1962, p. 94).

The left accepts that low-paid workers respond actively to news of better paying job opportunities. They do this by arguing that a living wage improves the quality of recruitment pools. More workers apply for the living wage vacancies on the news of a living wage policy. Fewer employees quit and they work harder in response to a living wage.


Activists should mind how they go by stressing an inequality of bargaining power but also letting through the door even one market discipline such as a sensitivity of wage offers and profits to job turnover rates:

Let us consider the extreme case of highly specialized, non-versatile labor. If we consider (a) the continuous replacement of personnel who gradually leave through competing employment openings, retirement and death, and (b) (in an expanding industry) the recruitment needed for expansion, we must recognize that the probability of the workers’ exploitation is remote. The observable labor turnover between firms suggests indeed that collusive action to reduce the price of labor has virtually never been regarded as profitable (Hutt 1973, p. 4).

But not every worker knows there are better paying options which may be even just a few steps away from their current job. Information costs are a better explanation than pinning everything on an inequality in bargaining power. This is because information costs have a profound impact on labour market workings (Stigler 1962; Alchian 1969; Alchian and Allen 1967, 1983). For unequal bargaining power to keep the wages of the low-paid down, collusion must succeed between a great many employers recruiting across many industry and occupational labour markets (Hutt 1973, Alchian and Allen 1983).

More insight is gleaned from the fact that job seekers do not initially know the location of suitable vacancies, the wages for various skills, differences in job security and other factors. They must find this knowledge, keep it current and forecast whether better vacancies may open soon. Employers must learn the location, availability and asking wages of suitable applicants.

Long-term contracts arise to share risks and curb opportunism over sunken investments in specialised human capital. These factors lead to queues, unemployment, spare capacity, layoffs, shortages, inventories and non-price rationing in conjunction with wage rigidity (Alchian 1969; Alchian and Allen 1967, 1983). Labour market analysis must stay within McCloskey’s maxim that

Every piece of economic analysis is not complete until everyone is earning only normal profits, or at least the analyst can identify a reason why not (McCloskey 1985).

The labour market has good and bad jobs, the jobs that can pay more than or less than the going rate, resulting from the costs of job search and matching. These good and bad jobs arise from the element of chance in every job search and job match rather than betting it all on an enduring employer conspiracy to keep wages down. Some workers are paid less than the going rate because they are down on their luck rather than under the thumb.

Who haggles over wage offers and why?

The strength of alternatives to no agreement drives wage bargaining as Alchian and Allen explain:

An important truth is that employers compete against other employers, and employees against other employees-not employees against employers, as folklore says. It is the availability of higher-valued alternatives, not the ability to bargain collectively, that increases bargaining power (Alchian and Allen 1967, p. 328).

The side with more outside options and a stronger ability to credibly commit to a specific wage offer wins the larger share of the split (Manning 2005; Cahuc and Zylberberg 2004; Lazear 1998).


Those searching for new jobs while on-the-job play a better hand than the unemployed (Manning 2005). Concerns about workers not holding their own in this wage bargaining date back to Adam Smith:

… in the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate (The Wealth of Nations).

Calls for a minimum wage arise partly out of concerns over who has the upper hand in bargaining:

… labour is often sold under special disadvantages arising from the closely connected group of facts that labour power is ‘perishable’, that the sellers of it are commonly poor and have no reserve fund… The want of reserve funds and of the power of long withholding their labour from the market is common to nearly all grades of those whose work is chiefly with their hands.

But it is especially true of unskilled labourers, partly because their wages leave very little margin for saving, partly because when any group of them suspends work, there are large numbers who are capable of filling their places (Marshall 1920).

Take-it-or-leave-it wage offers are more common for lower paid vacancies (Cahuc, Postel-Vinay and Robin 2006). Employers who post the going rate for lower-paid vacancies saves transaction costs for both sides of a more routine job match (Alchian and Allen 1967; Boeri and van Ours 2013).

The take-it-or-leave-it offer for a standard vacancy to be filled by similarly qualified job applicants may reflect where bargaining would have gone in any case and so saves that predictable journey. The market discipline on employers is posting an offer below the going rate attracts an inferior job applicant pool (Mortenson 2003; Boeri and van Ours 2013; Cahuc, Postel-Vinay and Robin 2006).


A well-matched recruit is a valuable find and the better paid is the job, the more it is worth haggling over the spilt (Alchian 1969; Lazear 1998). One-third of workers bargain over the wage paid in a new job; only about 5% for blue collar workers haggle but 86% for knowledge workers make counter-offers (Krueger and Hall 2012; Brenzel, Gartner and Schnabel 2014; Brenčič 2012). The less skilled job seeker finds new jobs faster because they have less specialised human capital to match up with prospective vacancies than say a knowledge worker (Alchian 1969; Oi 1983, 1987: Lazear 1998).

Lower paid jobs entail less search and bargaining because there is less to haggle over; there is more variance in applicant quality and goodness of fit for higher paid vacancies so both sides search for longer and haggle more (Lazear 1998; Alchian 1969; Oi 1987).

The going rate for low skilled vacancies is common knowledge. Employers that post an inferior offer risks lowering the quality of their recruitment pools. It saves search costs for both sides to post the going rate (Alchian and Allen 1967; Lazear 1998). The rub is less skilled employees are laid-off sooner in downturns because less firm-specific human capital is lost for both sides of the job match (Oi 1962, 1983; Becker 1993).

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