Boudreaux on Monopsony
I agree with Don that it’s not.
However, I don’t agree with either of his two major arguments for why it’s not widespread.
Here’s Don’s first argument:
To back his assertion, Prof. Posner refers to “academic research on labor markets” that allegedly shows that “millions of Americans are paid thousands or even tens of thousands of dollars less than they should be paid.” Well, I can point to academic research on labor markets that shows the opposite, namely, that growth in worker pay has kept pace with growth in worker productivity. (See, for example, here and here.) This finding is inconsistent with the prevalence of monopsony power.
The problem with this argument is what we at UCLA when I was a graduate student called a “rate versus levels” issue. Let’s say we accept, which I do, that growth in worker pay has kept pace with growth in worker productivity. That does not mean that pay has kept pace with productivity. It could be the case that productivity and real pay each grow at 1 percent a year. It could also be the case, at the same time, that pay is 10% below productivity. The latter would be evidence of monopsony even though the former is correct.
I’m not saying that there is a monopsony. I am saying that if there’s a systematic gap between pay and productivity, both could be growing a the same rate and that would not be evidence against monopsony.
Don’s second argument is a version of “If you’re so smart, why aren’t you rich?” Don writes:
If Prof. Posner, along with the academic researchers he cites in support of the claim of widespread monopsony power are correct, they should stop writing papers and op-eds about the problem and instead start their own companies – companies that will bid away these underpriced workers from their current employers and, in the process, raises workers’ wages. Because in this case there is no good reason why Prof. Posner should not put his own money and effort where his mouth is, the fact that he doesn’t do so tells me that he either does not really believe his assertion or, more likely, that he doesn’t understand just what it is that he’s asserting.
Here’s my problem with that argument. Many skills are required to run a successful business. Understanding that workers are underpriced is not the only element required for Posner or others to succeed. They also need to know how to market a product, how to produce a product, how to respond to competitors, how to find workers, how to motivate workers, how to deal with intrusive governments, etc.
I’ll give an example from my own life. In the early 1980s, when I was an economist in President Reagan’s Council of Economic Advisers, I thought I had a way of importing Japanese cars from Guam and avoiding Reagan’s restrictions on Japenese imports. Reagan and his U.S. Trade Representative Bill Brock always emphasized that these were not formally Reagan’s restrictions but, instead, were a voluntary export restraint imposed by Japan’s government on its own car exports.
So I thought that one could buy cars in Japan and ship them to Guam and then ship them to the United States. The Japanese exporters would not be violating their government’s restraint and the U.S. government had no legal say.
So I went to a major free-market-oriented lawyer in the Reagan administration who was in my building to run my idea by him. I wanted to see if he thought my legal reasoning held water. Also, he was independently wealthy and I thought he might be willing to put in $1 million or so to make it happen.
He told me that my idea might hold water and we should think about it. After about a day, he got back to me with the slam-dunk argument against going ahead. He pointed out that if I was right, that’s all I knew. I didn’t know how to buy 1,000 cars, how to ship them, how to sell them in the United States, etc. So even if our margin on the cars was as much as $1,000 on each (a big number in 1983) we could easily lose that or more by screwing up on the other elements.