Monopsony

The REAL problem:

That’s not how things work when competition breaks down and companies can exercise monopsony power. If that happens, businesses may find it’s more profitable to pay workers less than their worth. (Shocking, I know.) But this creates a dilemma for bosses who can’t find any more workers willing to work for low pay. Management can either advertise higher wages, and risk having to bump up its current workers’ earnings as well. Or it can keep advertising the same cruddy wage and end up not hiring anybody. In the textbook models, employers choose the latter—more profits, less staff. (Shocking, I know.) As President Obama’s Council of Economic Advisers explained in its brief on monopsony back in 2016, “Economic theory shows that firms with monopsony power have an incentive to employ fewer workers at a lower wage than they would in a competitive labor market. What the monopsonistic firm loses in reduced output and revenue, it more than makes up in reduced costs by paying lower wages.”

Here’s a hypothetical example of how the theory might play out in the real world. Let’s say you manage a small construction company, and you’ve been getting away with paying your crew relatively little because there aren’t that many other contractors posting help-wanted ads in your town. You need a new carpenter. But you don’t want to tick off the rest of your men by offering this new potential employee a more generous wage. So you post the job with the same mediocre hourly rate you’ve offered for the past three years. Nobody good responds, and to you, this looks like there aren’t enough talented carpenters out there. But in reality, there’s only a shortage of people willing to work at the artificially low wage you’ve set your heart on paying. The real problem isn’t a skills shortage, it’s that you aren’t offering market wages, because the market isn’t functioning.