Monopsony: The Heart of America's Economic Troubles

BY JULIA OFFUTT

The notions of growth and prosperity embodied by the American Dream are largely supported by the United States’ economic record. Since the late 1940s, the U.S. has seen an average of over three percent growth in GDP per year. What these statistics don’t show, however, is that real wages have only risen three percent since the 1970s. So, if all of the wealth yielded by this consistent economic growth isn’t translating into proportionally higher wages for workers, then where is it all going? The short answer is that is being directed into the pockets of large corporations.

The issue of stagnating wage growth is a frequent topic of political discourse, especially around election times. During the 2016 presidential election, for example, Bernie Sanders decried big business for outsourcing jobs to countries able to provide cheaper labor. On the other end of the political spectrum, Donald Trump condemned companies like Apple and Ford for shipping work overseas, leaving many Americans jobless and with limited employment options. As was the case here, problems with the labor market are most often attributed to factors like globalization and automation. For the most part, these phenomenons provide clear-cut answers. But while they do hold corporations responsible for wage growth stagnation, they do not cut to the root of the issue. Another less frequently highlighted explanation for slowing wage growth is the shift in labor market power away from workers and towards employers.

Conventional economic assumptions take for granted that labor markets are competitive: that is,  employers have to compete for workers, usually resulting in better conditions and benefits for their employees. However, an economic occurrence called a monopsony – referring, in this instance, to employer market power – has displaced this assumption, rendering it invalid for decades now. This employer market power stems from the inelasticity of the labor market. In other words, even when wages stagnate or even decrease, workers are unlikely to quit because of their heavy reliance on their current employment. This inelasticity does not stem from worker specialization, as intuition might suggest. While it is logical that workers who spend time and money to acquire special skills would have fewer options on the job market, this has not been shown to be the case. On the contrary, even the market for low-skill labor has been found to be fairly inelastic, indicating that higher instances of worker specialization is not the cause of wage stagnation.

There are several factors that have contributed to the current monopsony preventing U.S. economic growth from benefiting average American workers. One prominent cause has to do with a trend that harkens back to the age of "company towns," where big corporations would set up towns near their factories for their employees. The obvious implication for this arrangement was that quitting was made a very difficult, or at least unattractive, option. Their employer was effectively the only game in town, and they would have to uproot their families if they wanted to quit and look for new work. Although this exact scenario may not be as commonplace today as it once was, there is a version of the company town that still exists.

For certain professions and in certain places, there are very limited – sometimes just one – options for work. It follows that these company town-type situations most often occur in relatively rural or isolated areas, and for professions necessarily restricted to a limited number of locations, like hospitals. In fact, a common example of the current “company town” is a nurse or other medical professional living in a small, rural town. A worker like this has invested a significant amount of time and money to receive the proper education and training. Based on this, it might be easy to assume that this person would present a competitive member of the labor market. However, if they live in a relatively isolated area, it is unlikely that they have very many options in terms of places to work. Companies take advantage of this and suppress the wages of their employees.   

Another factor contributing to this monopsony are noncompete clauses in contracts which, much like their name suggests, prohibit employees from leaving their jobs to work for a competitor of their employer. The effects of this are straightforward: workers, especially those with specific skill sets, have little choice but to continue working for the same employer, even if that employer suppresses or cuts their wages.  But it is worth noting is that nearly a quarter of all workers report being asked to sign a contract including a noncompete clause by either their current employer or a former employer. In addition to restricting options for workers, monopsonies also inhibit economic growth by reducing production, leading corporations to raise prices in order to compensate for this loss and ultimately resulting in decreased demand and lower wages for workers.

An important thing to take from all of this is that the major contributors to the current monopsony problem point to a single, cohesive solution: increased regulation of corporations. In this sense, politicians pointing fingers at big businesses for the economic woes of America are right. Large corporations are much to blame. When globalization and automation are criticized for stagnating economic and wage growth, the fault is misplaced. These features of economic development are, to a large extent, inevitable. It seems highly improbable that the future of industry would require, or even allow for, people to complete the menial tasks that it is both easier and cheaper for a machine to do, instead. It may well be true that globalization and automation have contributed to the rise in economic inequality, but they were decidedly beneficial in terms of overall economic growth by reducing production costs and expanding the market.

From a politician’s perspective, it’s quite challenging to effectively address an economic issue like the current monopsony if the underlying cause isn’t being correctly identified. Regardless of their political persuasion, anti-establishment figures like Senator Bernie Sanders seem to be right about one thing: corporations have run too free for too long. Given the lax restrictions on corporate contributions to political campaigns, the amount of corporate power going unchecked by government has troubling implications for upcoming elections. For this reason, it is that much more important that voters inform themselves about the current impact of corporations on the economy and their role in the campaigns of politicians.

As fall midterm elections approach, voters must ask themselves an important question: If the U.S. economy is growing more than three percent a year, on average, why are workers not seeing this growth represented in their wages? The shift in labor market power toward big corporations is definitely part of the answer.