Monopsony in the Labor Market - Research Paper Example

AND ANALYSIS OF MONOPSONY IN THE LABOR MARKET Introduction: Monopsony is an economic term which means a condition when there is only a single buyer in the market and there are a number of sellers. Similar to monopolist, a monopsonist condition also has authority over price through a control over the quantity. A monopsonist confronts the supply curve that is between the price paid and quantity purchased. But a competitive buyer always accepts the price determined by the market. Therefore, a monopsonized market is characterized by a smaller quantity and a lower price. Just like monopoly, Monopsony also results in the inefficiency of the market. This happens due to the fact that a monopsonist avoids buying those last few units of a good whose value is greater than the marginal cost, to ensure that the price of already bought units is held down. A nicely placed price floor can lessen the inefficiency caused by Monopsony, removing the power of a monopsonist over price and eliminates his motivation to control the quantity it purchases. But a too high price floor can restrict the monopsonist and he may reduce his purchases, causing inefficiency. Let us now consider a labor market. In this market the employers are considered to be buyers, the workers are the sellers, time and effort is the good, whereas the price is the level of the wage or salary. An employer who is monopsonist keeps the level of wages down by controlling the number of workers he hires. This results in an inefficient employment and worker’s contribution to output is far greater than the salary he gets. Pigou (1924, p. 754) termed this condition as the “rate of exploitation”. We can show this mathematically that an employer who is monopsonist will opt or a rate of exploitation which is equal to the reciprocal of the labor supply elasticity. Those employers who are competitive face infinite labor supply elasticity. If they lower the wages, they face a threat of losing their workforce, and, therefore, they are not able to exploit their labor. Hence, competition causes the rate of exploitation to minimize. Incompetence and exploitation caused by labor Monopsony can be reduced by setting minimum wages, which are enforced by the government through the labor policies. Hence, the Monopsony model can be a way to offer justification and reasoning for minimum salary laws, as such laws and policies increases wages, enhances the chance of better employment rate, and ultimately improve and stabilize the economy. Monopsony Models There are several Monopsony models which are made to fit the real world scenario. One such model is the Oligopsony model. In this model, the employer has the power over the salaries and wages if they are not in big numbers. This power might come from mutual agreement between the employer and the workers, or it might come from the inflexible attitude of the workforce. The latter condition is called the Cournot model, which states that if an employer decides to cut the wages, then he will not lose his entire workforce to hi rival employer just because he will not be able to absorb additional workers immediately. As a result the employer enjoys some sort of liberty over the control of wages. This model implies that if the concentration of employment would be greater, then the rate of exploitation would also be high, keeping the labor demand and supply constant. Employer differentiation is another elaboration, which implies that if the employers vary by working conditions or by their locations, then they might not be treated as perfect substitutes by the workers. An employ that exploits and cut wages may lose some of his working force. Hence he has the authority up to that extent, to exploits and cut wages, that his rivals are either far away or they offer different sort of jobs. Recent studies and elaborations of this concept have focused on the process of hiring workers. It can be stated that workers once hired require a considerable increase in wages in order to change companies or jobs. This empowers the employers to control the wages for already existing workforce, but new hires do not come under this domain. In order to minimize quitting of jobs by workers, an employer must pay better than average wages. “Monopsony power depends inversely on the ease with which [workers] can move, and on the extent to which they and their employers consider the future, or look only to the moment.” (Hicks 1932, p. 83) Athletes Professional baseball is an example of monopsony in the American labor market. The reserve clause in the contracts of players bound them to a single team. This shows an extreme level of conspiracy. Due to this clause the teams did not fight for players. This was the era when the rate of exploitation was at its highest level. Players were under paid compared to the level of commitment they were bound to show. This clause was removed in 1976 and now players with a minimum of six years experience were allowed to switch to different teams. As a result, their salaries increased. The rate of exploitation fall to zero by the year 1989 (Zimbalist, 1992). It is to be noted that the emergence of rival leagues in sports have caused the salaries of players to increase, as the reserve clause could only be enforced among teams that compete in the same league. In the absence of such rival leagues, players were paid only the half of the value of their commitment to the game. Teachers and Nurses For some years it has been investigated if the American school teachers and the nurses are being victimized by monopsony. It is a fact that both the professions have a very limited number of potential employers. For a teacher, only the school districts are the employers which are separated by political boundaries from each other. As for the nurses, there major employers are just the hospitals which are located geographically, with the exception of big cities. It is to be noted that most of the teachers and nurses are married professionals and for them it is nearly impossible to move to a new location, especially if their husbands are employed somewhere in their already employed geographical region. So the olgopsony and differentiation models are applicable in this case. Luizer and Thornton (1986) and Link and Landon (1976) found, concerning teachers and nurses respectively, that the employer and employ relationship was negative, that is, it refers to oligopsony. For rural areas there were a less number of employers for a very high concentrated workforce. For metropolitan centers, it was quite the opposite. But it is also true that the wages of those professions which are a lot more specialized are also low in the rural areas as compared to the big cities, so we cannot openly blame monopsony. “Employer concentration has little effect on wages”. (Boal and Ransom 1999) A recent study by Boal (2001) shows the legal minimum salary effect on teachers’ employment in two states of the United States. The study showed that an increase in legal minimum salary decreases employment, which suggests that the market for teachers is more competitive, and not monopsonistic. University Professors University professors face a problem of moving cost, which gives power of monopsony to the university, as the professors are highly qualified and their employers, that are the universities, are geographically widespread. The market for new professors is competitive, as these new hires must pay the moving costs irrespective of whoever hires them. But the market for already hired is a victim of monopsony because a professor once hired will require a high moving cost to switch from one university to another. This moving cost model causes a negative relationship between the seniority and wages. Miners in Company Towns Company towns are small remote towns with only on employer. It is a great example of monopsony; especially towns of the nineteenth and early twentieth centuries were regarded as a victim of monopsony, primarily because of the expensive transportation. Such towns are most common in mining industry, whose location is determined by the mineral deposits. In such towns the housing and other civil infrastructure was owned by the employer. This condition gave the employer a power to control the workforce and dictate his terms. However, it was argued by Fishback (1992) that this arrangement helped to reduce the living costs for the workforce. Company towns were most common for the coal mining industry. In the 1920’s it was estimated that about 79 percent of the coal miners were living in housing owned by the companies. Boal (1995) showed that coal mining companies were not differentiated and they had little power over the control of wages. A cut in wage of 1% would be a cause of a loss of 2% of the workforce in that year, and might cause a loss of the entire workforce in the long run. Textile Mill Workers Studies have been conducted to determine if whether America’s initial factories, New England Textile Mills, were having monopsony power. Some studies show that as these factories grew in size, they were forced to raise the wages so that they could attract workers from other areas, at least in the early nineteenth century (Lebergott 1960). Some researchers did not find any relationship between size and salary but they did find some clues of collusion by the employers in determining the wages. (Ware 1966) Researches also tried to measure the exploitation rate by comparing the workers contribution to the output with the wage. The rates of exploitation vary from 9% to 100% for some of the mills in some years. But most of the estimates are inexact, so majority of the calculated rates are not importantly different from zero. (Vedder, Gallaway and Kligaman 1978) Low Wage Workers All the models of monopsony advised that a humble rise in the officially permitted minimum salary should increase employment. In the United States only young and unskilled workers were affected by the minimum wages. Small decrease in employment for unskilled workers was found in early studies in the 1970’s and early 1980’s. However no effect was found in later studies (Wellington 1991). The rate of exploitation is most probably very small. Labor Market in General Models suggest that nearly all employers enjoy some sort of monopsony power because workers cannot switch jobs instantly; they require time to search and find better jobs. Mathematical models like Burdett and Mortensen (1989) involve monopsony power even in the case of longer run and it forecasts that larger firms must pay higher salaries. On the contrary, search models also forecasts that majority of the firms pay high wages and only a few pay low wages. Conclusion A substitute explanation to the typical competitive model of determining wages was provided by simple monopsony. It states that employers will hold the wages to a lower level, below the last worker’s contribution to the output. This will be done by limiting the workforce. But this is in fact too simple to imply on American labor market. So oligopsony and employers differentiation is very much needed. Some estimates showing monopsony exploitation in American labor markets have shown surprising results. The issue of monopsony was not found to be important in markets for teachers and nurses, company mining towns, as suspected. On the contrary the more reasonable approximation of monopsony is for the professional athletes and college teachers. Estimated Rates of Monopsonistic Exploitation in American Labor Markets Labor market Estimated rate of monopsonistic exploitation* Source Baseball players subject to reserve clause 100% to 600% Scully (1974), Kahn (2000) Baseball players not subject to reserve clause Close to zero Zimbalist (1992) Teachers and nurses Close to zero Boal and Ransom (2000), Hirsch and Schumacher (1995) University professors Less than 5-15% Ransom (1993) Coal miners in early twentieth century Less than 5% Boal (1995) Textile mill workers in the nineteenth century Some likely, but no consensus on magnitude Vedder, Gallaway, and Klingaman (1978), Zevin (1975) Low-wage workers No consensus   Labor market in general 1% to 3% Brown and Medoff (1989) References: Boal, William M., R. Ransom, Michael. Missouri Teachers. Unpublished paper, Brigham Young University, 2000. Burdett, Kenneth, and T. Mortensen, Dale. Equilibrium Wage Differentials and Firm Size. Northwestern Center for Mathematical Studies in Economics and Management Science Working Paper 860, 1989. Print. Kahn, Lawrence M. The Sports Business as a Labor Market Laboratory. Journal of Economic Perspectives 14, no. 3 (2000). Print. Luizer, James and Thornton, Robert.Concentration in the Labor Market for Public School Teachers. Industrial and Labor Relations Review 39, no. 4 (1986). Print. Ransom, Michael R. Seniority and Monopsony in the Academic Labor Market. American Economic Review 83, no. 1 (1993) Print. Whaples, Robert. Is There Consensus among American Labor Economists? Survey Results on Forty Propositions. Journal of Labor Research 17, no. 4 (1996). Print. Sullivan, Daniel. Monopsony Power in the Market for Nurses. Journal of Law and Economics 32, no. 2 part 2 (1989). Print. Scully, Gerald W. Pay and Performance in Major League Baseball. American Economic Review 64, no. 6 (1974). Print. Read More