Monopsony power and the demand for low-skilled workers

This study analyses firms’ labour demand when employers have at least some monopsony power. It is argued that without taking into account (quasi-)monopsonistic structures of the labour market, wrong predictions are made about the effects of minimum wages. Using switching fractional panel probit regressions with German establishment data, I find that slightly more than 80% of establishments exercise some degree of monopsony power in their demand for low-skilled workers. The outcome suggests that a 1% increase in payments for low-skilled workers would, in these firms, increase employment for this group by 1.12%, while firms without monopsony power reduce the number of low-skilled, by about 1.63% for the same increase in remuneration. The study can probably also be used to explain the limited employment effects of the introduction of a statutory minimum wage in Germany and thus leads to a better understanding of the labour market for low-skilled workers. JEL Codes: J23, J42, C23, D24

The American Political Economy

This volume brings together leading political scientists to explore the distinctive features of the American political economy. The introductory chapter provides a comparatively informed framework for analyzing the interplay of markets and politics in the United States, focusing on three key factors: uniquely fragmented and decentralized political institutions; an interest group landscape characterized by weak labor organizations and powerful, parochial business groups; and an entrenched legacy of ethno-racial divisions embedded in both government and markets. Subsequent chapters look at the fundamental dynamics that result, including the place of the courts in multi-venue politics, the political economy of labor, sectional conflict within and across cities and regions, the consolidation of financial markets and corporate monopoly and monopsony power, and the ongoing rise of the knowledge economy. Together, the chapters provide a revealing new map of the politics of democratic capitalism in the United States.

Exporting and Offshoring with Monopsonistic Competition

We develop a model of international trade with heterogeneous firms and monopsonistically competitive labour markets. We show that due to monopsonistic competition our model makes sharply different predictions about the effects of the export of goods and the offshoring of tasks. Trade in goods is unambiguously welfare increasing since domestic resources are reallocated to large firms with high productivity, and firms with low productivities exit the market thereby reducing the monopsony distortion present in autarky. Offshoring on the other hand gives firms additional scope for exercising monopsony power by reducing their domestic size and therefore can lead to welfare losses.

The Measure of Monopsony

There has been increasing interest in recent years in monopsony in labour market. This paper discusses how we can measure monopsony power combining insights from models based on both frictions and idiosyncrasies. It presents some evidence from the UK and the US about how monopsony power varies across the wage distribution within markets, over the business cycle and over time.

Employment and Labor Law

Antitrust law cannot directly address wage suppression that occurs as a result of search costs and job differentiation, which cause frictions in labor markets. The question arises whether other employment and labor regulations can be used to reduce the monopsony power of employers that arises from these sources, or to mitigate its ill effects. These regulations include minimum wage law, tax and wage subsidies, mandatory benefits, job protection, licensing, training, job standardization, labor law, governance reforms, and macroeconomic reform. While some of these regulations, if well-designed, can help mitigate the harms of labor monopsony, many of them are ill-suited to this task.

How Do Anti-discrimination Laws Affect Firm Performance and Financial Policies? Evidence from the Post-World War II Period

We exploit the staggered passage of state-level fair-employment laws in the post-World War II period to examine how stronger worker protection against racial discrimination affects firm profitability and financing decisions. We find that firms experience a decline in operating profitability after the passage of anti-discrimination laws. We also document that the adoption of these laws leads to a reduction in debt ratios, which suggests that firms are able to partially offset the negative effects on operating profitability by adjusting their capital structure. Consistent with theoretical predictions, these effects of anti-discrimination laws are more pronounced for firms in states and cities with a greater proportion of African Americans, firms with high labor intensity, firms in states experiencing high African American migration, and firms in concentrated industries. Some of our evidence suggests that anti-discrimination laws lead to a reduction in statistical discrimination or monopsony power rather than taste-based discrimination. Taken together, our results are supportive of theoretical models of discrimination and show that racial discrimination laws significantly affect firm operating performance and financial policies. This paper was accepted by David Simchi-Levi, finance.

Oscar Robertson, Antitrust, and the Fight Against Monopsony Power in the NBA

Labor markets in sports have historically been dominated by the monopsony power enjoyed by owners. In the 1970s, Oscar Robertson argued in front of Congress that “…it’s terribly wrong for anyone to limit anyone’s ability to earn more money.” The data make it clear that Robertson’s wages—and the wages of other National Basketball Association (NBA) players—were indeed limited by the NBA’s reserve clause. Robertson, though, didn’t just make speeches. As the head of the NBA’s Player Association, he delayed a merger between the American Basketball Association and NBA and eventually created the NBA’s free agent market. His work dramatically increased the wages paid to NBA players. These victories, though, didn’t last forever. The many limits today on player wages in the NBA’s labor market suggest that Robertson’s fight has largely been forgotten by today’s NBA players.

Discrimination and Monopsony Power

Wage inequalities between identical workers of different race, ethnicity, and gender are a persistent feature of labor markets. However, most labor market models either ignore important empirical evidence or focus very narrowly on specific labor market dynamics. To better understand such wage differences, we create a labor market model that integrates firm competition for workers, employee movement between jobs in response to market signals, potential monetary frictions in the job transition process, and workers' collective action which is a function of government support. Our model shows that because of gender- and race-specific historical and social outcomes, like the relatively lower household wealth of Black and Latino families and the increased household responsibilities of women, women and minority workers are more exploitable; employers can push their wage farther below the value of their marginal product. Also, our model shows that the cumulative wage gap for non-White women is greater than the additive gaps of being nonmale and non-White. Lastly, our model shows that a reduction in government support for collective action enables employers to wield monopsony power more freely, independent of changes in employer concentration. Because certain groups are more exploitable, employers' increased capability in wielding monopsony power means increased wage differentials replicating discriminatory biases against marginalized groups of workers.