Monopsony Power in the Labor Market: From Theory to Policy

Labor markets are not perfectly competitive: Monopsony power enables employers to pay workers less than the marginal revenue product of labor. We review three theoretical frameworks explaining monopsony power. Oligopsony models attribute it to strategic interactions among a limited number of firms. Job differentiation models cite imperfect job substitution and heterogeneous worker preferences. Search-and-matching models point to search frictions hindering instantaneous access to all available jobs. We then develop a theory-informed discussion of the empirical evidence on antitrust policies, policies that reduce barriers to job switching, and policies countering monopsony's effects on workers. Preventing mergers and regulating noncompetition agreements can increase wages by preserving competition among employers. Minimum wages can mitigate the effect of monopsony power by increasing wages without reducing employment. The insights garnered from both theoretical models and empirical evidence offer a road map for crafting policies that can enhance competition in the labor market.