The Myth of Local Labor Market Monopsony

Robert D. Atkinson May 7, 2021
May 7, 2021

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Many economists and advocates, particularly progressives, have raised concerns in the past decade about the fact that wages have increased slower than productivity. Notwithstanding the fact that this divergence is overstated, it is true that raising wages is important.

The problem is that, rather than keep the focus on real solutions, such as raising taxes on wealthy individuals, increasing the minimum wage, promoting greater unionization, and spurring faster productivity growth, progressives proffer a dark narrative in which monopoly is the villain lurking in the background. If only we could break up big companies, they argue, all other economic problems would be easier to solve.

To prove that the U.S. economy is being crushed by rapacious monopolies they constantly repeat a host of claims: Price markups have increased, labor’s share of income has decreased, corporate profits are up, new firm start-ups are down, and the overall trend toward monopoly has grown. These are, by and large, false.

Yet, in their ongoing quest to find a monopolist under every bed, progressives have latched onto the notion of labor market monopsony. In other words, they claim that in too many local labor market, workers have only a few choices of firms to work for, and this enables firms to squeeze wages.

The most commonly cited scholarly work on the topic is from liberal economists Jose Azar, Ioana Marinescu, and Marshall I. Steinbaum. Indeed, their work has become the de facto view on the issue, with government officials, the media, and others citing it as scripture.

While Azar, Marinescu, and Steinbaum have published a number of articles on the topic, all of their work uses a similar methodology. They analyze local labor markets in the United States by comparing job openings and salaries using online job tools.

They looked at a combination of U.S. commuting zones and 200 six-digit occupational codes to assess the state of more than 117,000 specific labor markets in 2016. They found that 60 percent of markets were highly concentrated, while another 11 percent were moderately concentrated.

At first glance, it would appear they are on to something and that antitrust officials better get on the ball. But on closer inspection, while it helps advance the “monopoly crisis” narrative, it is actually much ado about nothing.

The reality is that most of the labor markets with high levels of employer concentration are rural and small-town areas with few employers overall. As they wrote, “Commuting zones around large cities have lower levels of labor market concentration than smaller cities or rural areas.” Ioana Marinescu explains, “This may contribute to explaining why wages are higher in urban areas.”

As any regional economist knows, wages are lower in rural Wisconsin than in Manhattan, not because there are more employers in Manhattan than in rural Wisconsin, but because it costs more to do business in Manhattan than it does in rural Wisconsin. For example, the cost of living in Dyersburg, TN (a community of about 18,000 people), is almost 25 percent lower than it is in Fort Lauderdale, FL, and home prices are 46 percent lower. So, you can be sure that workers in Dyersburg are paid lower wages than workers are paid in Fort Lauderdale.

A second problem with this line of work is that it assumes monopoly is the problem and antitrust enforcement is the solution. But imagine there is a “paper mill monopsony” in a small town in upstate Wisconsin. How exactly is antitrust supposed to solve that problem? Force the company to divide its mill in two, so each division can compete for the workers?

A third problem is that firms in smaller labor markets are generally smaller than firms in larger ones because of economies of scale. The markets are not as big. And as my colleague Michael Lind and I showed in Big Is Beautiful: Debunking the Myth of Small Business, on average, workers earn more in large establishments than they do in small ones.

A fourth problem is that these studies assume workers have only one skill and can only work in one occupation. This may be true for some professionals, like insurance adjustors, but it is less true for many other occupations. Someone who is looking for a job as a cashier can also look for a job as restaurant server. This is why one academic study of the issue concluded: “The prior literature has focused on industry and occupation concentration and likely overstates the degree of monopsony power, since worker skills are substitutable across different firms, occupations and industries.”

A related problem is that in at least one article that Azar, Marinescu, and Steinbaum have published, they looked at a small number of more specialized occupations, such as farm equipment repair, legal secretaries, mobile heavy equipment mechanics, industrial engineers, railcar repairers, tractor-trailer drivers, and insurance underwriters. This is likely why they found that in the average market there are only 2.3 recruiting employers at any time. Of course there are not likely to be very many firms in the same labor market employing railcar repairers. This is why the authors not surprisingly found high levels of concentration for railcar repairers. Clearly, the Justice Department needs to break up “Big Farm Equipment Repair.”

In fact, many workers can and do apply for jobs in more than one occupation. Moreover, as one study noted, “there is evidence of publication bias in parts of the literature, which results in negative estimates of supply elasticities receiving lower probability of being reported.” In other words, findings of monopsony are more likely to get published.

But, not deterred by these issues, the authors march on to their predetermined policy recommendations: more antitrust enforcement and breaking up existing companies. Besides the fact that labor monopsony is largely a non-existent problem and one that, to the extent it exists, stems from the inherent nature of small labor markets, breaking up companies would have little impact. The issue is not firms, but establishments. If two paper companies merge but retain their existing factories, and none of those factories are in the same labor market, then there is no increase in local labor market monopsony.

If progressives really want to fix the supposed problem of monopsony in small towns, they should breakup Big Small Towns! Force everyone to live in big cities. Then workers would be able to enjoy living in expensive apartment buildings or houses in the exurbs with 90-minute commutes. But, by God, they will at least not be subject to corporate monopsony!