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Courtesy The G Spot- Politics, Economics, Feminism:

Be honest — are you skipping all these monopsony posts? Are your eyes glazing over at the mere sight of this odd and hard-to-pronounce word? Well, I hope not.

But in case you are — and in case the reason for this is that you don’t have a clear understanding of what it is in the first place, and why it might be important — I’ll try to remedy that by providing a (hopefully) coherent and straightforward explanation of the concept. Then maybe if you have a better grasp of what monopsony is, you can go back and read the other posts, and they might be a little more interesting to you. I’ll also go on to highlight some of the policy implications of monopsony, and why I think it’s important not only in an abstract theoretical sense, but in a concrete political sense as well.

The literal meaning of monopsony is “one buyer” (just as the literal meaning of monopoly is “one seller”). In the context of labor markets, monopsony means one buyer of labor, that is, one employer. But that’s confusing, because these days when economists use the term in the context of labor markets they usually don’t mean one employer.

Here’s what they do mean: in the standard labor market model, known as the perfect competition model, the market as a whole — that is, the supply of labor (all workers seeking a job) and the demand for labor (all jobs being offered by all firms) — determines the wage. The market-clearing wage occurs at that point where labor supply equals labor demand.

Moreover, in the perfect competition model, no single firm has the power to determine the wage; it simply accepts the wage that the market as a whole has determined, and that is what it offers to its workers. In this model, workers are extremely wage-sensitive, so much so that if any single firm cuts wages by even one cent, all the workers at that firm will immediately quit and find employment elsewhere.

In the monopsony model, however, the theory is that the employer has what is known as “market power,” and therefore is not a “wage-taker” (i.e., doesn’t have to offer the market wage). In this model, it is assumed that it’s the employer, not the market, which sets the wage. Therefore, in the monopsony case, the employer will offer below-market wages. And moreover, it’s assumed that the source of the firm’s market power are forces that bind an employee to an employer, so that if wages were cut, at least some of the employees would stay. 

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