Monopsony

Overview

Monopsony is market power held by a buyer rather than a seller — in labor economics, an employer's ability to pay workers less than their competitive marginal product because workers face frictions (search costs, relocation costs, few local alternatives) that make it costly to leave for a better-paying job.[1] Alan Manning's Monopsony in Motion: Imperfect Competition in Labor Markets (Princeton University Press, 2003) reframed this from the textbook single-buyer-town case to a general description of most real labor markets: because switching jobs is costly, the labor supply curve facing any individual employer slopes upward rather than being flat, giving even ordinary employers some wage-setting power.[1] The gap between a worker's marginal product and their wage under monopsony is a rent captured by the employer — the labor-market analogue of the rent a landowner captures from a fixed, undersupplied asset, though the underlying mechanism (search frictions, not fixed physical supply) is different from land.

Empirical work has since tried to measure this power directly. José Azar, Ioana Marinescu, and Marshall Steinbaum, "Labor Market Concentration" (NBER Working Paper 24147, 2017; published in the Journal of Human Resources 57(S), 2022), used job-posting data across thousands of local occupation-by-region labor markets in the US and found that a move from the 25th to the 75th percentile of employer concentration is associated with a wage decline of roughly 17%, consistent with concentrated employers exercising monopsony power.[2] This literature — along with related work on non-compete clauses and no-poach agreements — has become a central input into US antitrust discussions of labor markets since the mid-2010s.

Relevance to the Rent Debate

Monopsony matters to this wiki because it is a buyer-side rent channel, distinct from the seller-side monopoly rents the wiki already covers under superstar firms and rising markups (De Loecker, Eeckhout & Unger). Where those pages ask whether firms extract rent by charging consumers more than a competitive price would allow, monopsony asks whether firms extract rent by paying workers less than a competitive wage would require — a mechanism that can coexist with, or substitute for, seller-side market power in explaining the falling labor share. Per the wiki's rent-gradient rule, monopsony sits well out on the contested frontier: unlike land, which is fixed in supply, labor markets are not literally scarce in the same sense, and the size of monopsony's aggregate effect on wages remains an active empirical dispute rather than a settled fact.

Radical Markets (Posner & Weyl, 2018) applies the concept in two chapters: Ch. 3 proposes a Visas Between Individuals Program partly to break employers' monopsony power over migrant workers, and Ch. 5 argues that dominant data platforms hold monopsony power over the data individual users generate, motivating the data as labor proposal to pay users for that input rather than let platforms capture it for free.

See Also

• Data as Labor — the Radical Markets Ch. 5 proposal built directly on platforms' monopsony power over user data
• Superstar Firms — the seller-side market-power account of the falling labor share, for contrast
• De Loecker, Eeckhout & Unger — markups — the parallel seller-side rent evidence
• Radical Markets (book page) — the discovery source for this page
• Rent-Seeking — the general concept of capturing rather than creating wealth

Sources

1. Alan Manning, Monopsony in Motion: Imperfect Competition in Labor Markets (Princeton University Press, 2003), Ch. 1 introduction. personal.lse.ac.uk/manning/work/mimintro.pdf (author's own posted copy) — used for the definition of monopsony as employer wage-setting power arising from labor-market frictions rather than a literal single buyer.
2. José Azar, Ioana Marinescu & Marshall Steinbaum, "Labor Market Concentration," NBER Working Paper No. 24147 (2017); published in Journal of Human Resources 57(S) (2022): S167–S199. nber.org/papers/w24147 — used for the concentration-wage elasticity estimate.
3. Eric A. Posner and E. Glen Weyl, Radical Markets: Uprooting Capitalism and Democracy for a Just Society (Princeton University Press, 2018), Ch. 3–5 — the discovery source; used for the VIP migrant-labor-monopsony proposal and the data-platform-monopsony argument. See also the wiki book summary.