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This is Part 2 of the Planet Money newsletter's series on "monopsony power." The first story centered on the labor economics of the classic sci-fi horror movie Alien as an introduction to an extreme version of the concept.
Last week we began our monopsony story with Alien. This time we're starting with something even more exciting: an afternoon tea.
It was the early 1930s in Britain. And a young economist named Joan Robinson and her husband were having tea at their home near Cambridge University. Chamomile? Oolong? We don't know. But we do know their guest was B.L. Hallward, a scholar of ancient Greece. That seemingly random detail becomes important to this story.
In the years after this meeting, Robinson would go on to become an influential author, a rabble-rousing professor, and a celebrated member of the "The Cambridge Circus," an intellectual group closely associated with John Maynard Keynes during the Keynesian revolution.
But when she sat down for tea with Hallward in the early 1930s, Robinson was far from achieving all of that. She wasn't yet a professor. She had no influential books or papers. And, like many women at the time, she was struggling to break into a male-dominated field that wasn't exactly rolling out the welcome mat.
Robinson, however, was writing her first book, and it would help change everything for her. Probably because the book was so brilliant and audacious. With it, Robinson aimed to demolish an important pillar of old-school economics and replace it with something new. She would give this book the title The Economics of Imperfect Competition.
For a long time, economists had focused on the opposite — the economics of perfect competition. It's still a staple in Econ 101. Think a bajillion businesses competing. Infinite consumer and worker choices. No one has real power. Intense competition acts as a check against a company's worst impulses. They can't jack up prices because competitors can just swoop in and undercut them at any time. And they can't underpay workers because rival firms will poach them away. It paints a sort of dream version of the free market where there is no power, no exploitation, no shenanigans — and outcomes almost always serve the public interest.
The problem? Economists knew the real world often didn't look like the fantasyland that they sketched on their blackboards. They weren't naive. They knew markets could be uncompetitive. Since at least the 16th century, for example, scholars had used the term "monopoly" to refer to situations where a single seller dominates a market.
But Robinson, as she was writing her book, noticed something was missing: there was no word for when a single buyer dominates a market. It's a concept that's especially important for the labor market — because employers buy our labor. What would it mean for workers and society if there was something like monopoly power on the buyer side?
Calling a company "a monopoly buyer" was kinda awkward. Because monopoly is a Frankenstein word stitched together using roots from ancient Greek — and it means one seller. So "a monopoly buyer" would translate to "one seller buyer"? It didn't make any sense.
This is why that random detail that Robinson was having tea with that scholar of the classical world, B.L. Hallward, is important. Because Hallward was familiar with ancient Greek.
Robinson told Hallward that she wanted to coin a similar word to "monopoly," but one that centered on buying instead of selling. They played around with Greek words, and they settled on "monopsony."
Monopsony is a cool word for an important idea, especially in labor markets: when employers face limited competition for workers, they gain power to pay them less and treat them worse than they otherwise could.
While Robinson and other scholars believed monopsony power could be a significant force in the economy, for a long time mainstream economists treated monopsonies as a kind of unicorn — found only in rare circumstances, like small towns with a single dominant employer or companies that employ highly specialized kinds of workers who don't have other job options.
But in a new book, The Wage Standard: What's Wrong in the Labor Market and How to Fix It, the economist Arindrajit Dube offers a theory — drawing on a growing body of peer-reviewed research — that monopsony power is much more widespread throughout the economy than previously thought, even in markets that at first blush seem rather competitive. And that matters because monopsony power could be used to suppress wages.
"The truth is employers have a lot of real power over setting wages, and when that power goes unchecked, paychecks stay smaller than they should be," Dube says.
Without fierce competition checking how employers treat and pay workers, companies may need something else to check their power. Dube argues one important reason why income inequality has exploded in America since the 1980s is due to a systematic erosion of countervailing forces to monopsony power. Think like a federal minimum wage that's barely budged, laxer antitrust enforcement, declining labor unions, and a vibe shift in corporate boardrooms away from concerns about pay fairness.
But Dube offers some optimism in The Wage Standard. In recent years, he says, the United States has seen movements that have successfully confronted monopsony power and pushed our society towards greater equality and fairness in the labor market. And he offers a range of policy ideas that he believes could do much more.
How monopsony faded — and returned
Despite the influence of The Economics of Imperfect Competition, which was translated into more than a dozen languages, the concept of monopsony power would go on to collect dust on the shelves of mainstream economics.
Most economists assumed the labor market was generally competitive enough that monopsonies could be treated as a footnote. And they continued to embrace and teach an influential framework centered on perfect competition. The model is a hallmark of Econ 101 — so widely used it's often called "the standard model."
In that model, employers have little or no power to set wages because they compete intensely for workers. If a company tries to be stingy, workers can simply go somewhere else for higher pay. " The econ textbook says that in a competitive market, if your boss underpays you, you leave," Dube says.
That's why, in this framework, wages aren't really set by the choices of employers — they emerge organically from the market. It can almost seem magical. In the textbook portrayal, "the invisible hand" of the free market brings the supply and demand for labor into a kind of perfect embrace by finding the exact "right" wage that will bring them together.
This model has a powerful implication. If the government steps in and mucks with the price of labor — by, say, imposing a minimum wage that makes labor artificially more expensive — that sends supply and demand out of whack. At this government-imposed higher wage, employers demand less labor while workers want to supply more of it. The result, in theory, is unemployment.
For a long time, a core prediction of this competitive model became almost like a dogma for many economists: a minimum wage will lead to higher unemployment.
Which is why the road to taking monopsony power more seriously began in the early-to-mid 1990s, when the economists David Card and Alan Krueger kicked off a revolution in economics with an innovative study on the effects of minimum wage laws.
When Card and Krueger analyzed the effects of a minimum wage hike on the fast food industry in New Jersey, they found no evidence that it killed jobs. The finding triggered a major shift in economics (for more on this, check out this Planet Money newsletter from when David Card received a Nobel Prize in economics, largely for this work).
For economists who embraced old-school models of a competitive labor market, Card and Krueger's findings were a head-scratcher. And they began theorizing why a minimum wage would not kill jobs. And it re-energized interest in what was then a pretty fringe idea about the labor market: that it was full of employers who had monopsony power, or the ability to influence wages.
The basic idea is that, maybe, employers don't have to literally be the only employer in town in order to underpay workers, so when the government comes in and forces them to pay more with a minimum wage law, it doesn't actually kill jobs because employers have considerable wiggle room to pay their workers more. Meanwhile, that higher wage has benefits for employers, like lower turnover or higher productivity, and so economic damage is relatively minimal.
Still, despite this evidence and some early enthusiasm, the idea that monopsony power was pervasive in the economy remained kinda fringe. Even as late as the early 2010s, Dube says, monopsony power was "a very niche topic," and he recalls these small conferences in "remote locations" where he and ragtag crew of economists would discuss monopsony issues for several days "because, hey, this is all the people who were interested in the topic."
Monopsonyfest 2010 was apparently a dud and had a bunch of vacant seats. But Monopsonyfest 2026? It's sold out and getting lit.
Over the last decade or so, there's been an explosion of studies in top journals, including by Dube, finding that monopsony power is quite pervasive. And many economists are taking monopsony power more seriously these days.
Why monopsony power might be everywhere
So why, in Dube's view, is monopsony power so widespread, even in places where there seem to be numerous employers competing to hire and retain workers? In the book, Dube mostly answers this with what he calls the "triumvirate of endemic monopsony." These three reasons are "concentration, search frictions, and job differentiation."
First of all, Dube says, research suggests that if you look at how many employers there are in a given area for particular kinds of workers, "the typical American [labor] market is about as concentrated as having about three employers. And that's a very shocking number."
So, yeah, we're not talking about literal monopsonies dotting the American landscape. But research suggests, at the same time, there is often not intense competition between employers for workers either. Worker options are somewhat limited, and so they might be less gung-ho to quit if an employer kinda sucks.
"If a company's paying 10% lower in a highly competitive market, quits should just go off the roof," Dube says. But studies find they don't. Yes, people often do quit lower-paying jobs when higher-paying options present themselves, but not nearly at the rate classic models would predict.
Second, there are "search frictions." In other words, there are logistical challenges for workers looking for a new job. They have to find information about job openings, apply for it, interview for it, risk getting rejected, fill out paperwork, and so on. These "frictions in job transitions prevent workers from easily moving to better-paying companies that may be interested in hiring them," Dube writes. "The resulting 'puddles' give employers monopsony power, even in dense metropolitan labor markets."
Finally, there's what he calls "job differentiation." Every job is different, and keeping certain jobs may be desirable for reasons beyond just pay. For example, if you live close to your job, you may not want to switch to another job that is further away. Or you might like a particular manager or your co-workers or something else. "Just as brand loyalty in cereals can give a single company like General Mills — the maker of Cheerios — some pricing power, so can a worker's personal attachments or convenience factors give an employer wage-setting clout," Dube writes.
Beyond the "triumvirate of endemic monopsony," employers sometimes intentionally collude to make it harder for workers to jump ship and work somewhere else. Dube says this concept goes back well before Joan Robinson. He traces the concept as far back as the late 1700s, when Adam Smith, in his classic book, The Wealth of Nations, wrote, "Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate."
One incarnation of this sort of monopsonistic collusion is known as a "no-poaching agreement." These agreements tend to be illegal, and the federal government has worked to unravel them.
For example, Dube says, in the early 2000s, the big tech companies "had a secret agreement to not recruit each other's engineers. If you worked at Apple, Google wouldn't call you, and vice versa."
During a federal investigation of these collusive agreements, investigators actually uncovered an email from Steve Jobs enforcing this no-poaching agreement. A recruiter from Google apparently made the "mistake" of seeking to recruit an Apple employee. Jobs, the CEO of Apple, was unhappy, and he emailed the CEO of Google, Eric Schmidt.
In a very short email, Jobs wrote, "Eric, I would be very pleased if your recruiting department would stop doing this."
Google then fired the recruiter who sought to hire this Apple employee. When Jobs found out, he sent an email with a simple response: a smiley face :).
What monopsony power means for workers
If you believe that the economy is filled with companies exercising considerable monopsony power, how wages get set looks much different than the standard model, and it has serious policy implications. Worker pay and income inequality becomes about more than just market forces, and the delicate dance of supply and demand for particular kinds of workers with particular kinds of skills and credentials.
In a world with companies that have considerable monopsony power, employers have more discretion to set wages how they like. And things like power, institutions, social movements, culture, unions, and beliefs can matter for determining how much workers get paid.
Sometimes what executives believe, either morally or strategically, could really matter. For example, Dube says, look at UPS and FedEx. They have ostensibly very similar business models. "Same trucks, same routes, same neighborhoods," he says. But, he says, UPS pays considerably more than FedEx. It's a similar story with Walmart versus Target. Target pays considerably more. "Again, it's the same sector, similar labor pool, but very different wages."
Dube argues it's hard to explain these differences with old-school competitive models of the labor market. " That really is only feasible in a market where they actually have some power to set wages — i.e. monopsony power," Dube says.
So how, in Dube's view, do we compel employers to pay more and reduce the gap between those with the big paychecks and those scrimping to get by? Dube says we need to make choices, both in the public and private sectors, that create greater fairness in pay.
Dube argues that Americans have already started doing the work. Over the last decade, for example, after a long period of federal inaction, states and localities have been passing higher minimum wage laws that are raising pay at the bottom of the income distribution. And there have been political movements and public pressure campaigns against leading employers, which have essentially shamed them into adopting "voluntary minimum wages."
In 2018, Dube writes, Amazon adopted a voluntary minimum wage of $15 an hour, a number that had been demanded by labor unions and activists in the "Fight for $15."
Dube offers a whole bunch of ideas for how to combat monopsony power and deliver workers higher pay in the book. One he believes is important is revitalizing collective bargaining. Dube, for example, argues we should adopt sectoral bargaining like other industrialized nations, where unions or policymakers set industry-wide minimum pay standards for the workers in whole industries or types of occupations.
" It's about choices," Dube says. Stagnant wages and extreme income inequality are not inevitable. "It was the result of choices by corporations, by policymakers, and by experts, including economists who told us too often that markets were working just fine."
The Wage Standard is a compelling book. It would be sad — and ironic — if it had only one buyer. Maybe check it out?
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