Monopsony: Today's New Labor‐Market Reality

Abstract

In today's largely nonunion labor market, the default model used by many economists and policy makers is that of textbook competition. The textbook model suggests a mutual balancing of worker and employer interests and implies that laissez‐faire and deregulation is the appropriate policy norm, but in the 1930s and before, the default model for a nonunion labor market was employer monopsony. There are many reasons to suppose that monopsony should be the default model again. A monopsonistic labor market—one where employers have market power—has a stabilizing effect at the macrolevel. Failure to recognize monopsony thus left macro policy makers surprised by the economic outcomes of the 1980s and 1990s. Yet, monopsony has a dark side in terms of income distribution and the provision by employers of wages and conditions at the microlevel. Laissez‐faire and labor‐market deregulation therefore cannot be the policy norm under monopsony.