This article first appeared in the Planet Money newsletter.
Last week we began our monopsony story with Alien. This time we start with afternoon tea.
In the early 1930s near Cambridge, a young economist, Joan Robinson, hosted B.L. Hallward, a scholar of ancient Greece. Robinson was working on a book that would reshape economic thinking: The Economics of Imperfect Competition. Economists had long taught models of perfect competition — countless firms, endless choices, and no one able to exert real power over prices or wages. But the real world often diverged from that ideal, and Robinson noticed a missing concept: what do you call it when a single buyer, rather than a seller, dominates a market? In labor markets, employers buy labor. Robinson wanted a word for employer-side market power. With Hallward’s help, she coined monopsony — a Greek-rooted mirror of monopoly — to describe markets where buyers have power to push down prices. In labor markets, monopsony lets employers pay less and treat workers worse than competitive models predict.
For much of the 20th century, monopsony was treated as a rare curiosity — a small-town problem or an issue for specialized labor. Economists largely stuck with the textbook “standard model” that assumes competitive labor markets. If employers tried to underpay, workers would simply find other jobs; government interventions like minimum wages would, in theory, cause unemployment.
That began to change in the 1990s. David Card and Alan Krueger’s influential study of New Jersey’s fast-food minimum wage found no job loss after a wage increase. The result puzzled many and sparked renewed interest in monopsony: if employers have room to raise wages without firing workers, maybe many labor markets aren’t as competitive as the standard model implies. Over the last decade, research proliferated showing monopsony features are widespread, and the topic moved from niche conferences to mainstream attention.
Arindrajit Dube, in his new book The Wage Standard: What’s Wrong in the Labor Market and How to Fix It, argues monopsony is much more pervasive than previously believed — even in seemingly competitive markets — and that it helps explain why wages have stagnated and inequality has widened in the U.S. since the 1980s. He points to weakened countervailing forces: a federal minimum wage that barely rose, laxer antitrust enforcement, declining union power, and corporate priorities that deprioritized pay fairness.
Why might monopsony be common? Dube describes a “triumvirate of endemic monopsony”: concentration, search frictions, and job differentiation.
– Concentration: Studies show typical local labor markets for particular jobs often look like they have only a few employers — roughly the equivalent of three firms — which limits worker options and employer competition.
– Search frictions: Job changes involve costs and hurdles: finding openings, applying, interviewing, risking rejection, and logistical transitions. Those frictions make it hard for workers to move quickly to slightly better-paying jobs, giving employers room to suppress pay.
– Job differentiation: Jobs differ in ways beyond pay. Proximity to home, relationships with managers or colleagues, schedule, and other nonwage attributes make some positions stickier. Workers may accept lower pay to keep these advantages, akin to brand loyalty in product markets.
Beyond these structural reasons, employers sometimes actively collude to limit worker mobility. Dube traces this idea back to Adam Smith’s observation that employers tacitly combine to keep wages low. A modern instance is the notorious “no-poaching” rings among big tech firms in the 2000s. Federal investigators uncovered communications showing companies agreed not to recruit one another’s engineers; an email from Steve Jobs to Google’s CEO asking for the recruiting to stop became emblematic. Such agreements are illegal, and the government has prosecuted and dismantled many, but they highlight intentional efforts to restrict labor market competition.
If monopsony is widespread, wage-setting looks very different from the textbook picture. Employers gain discretion to set wages; pay becomes a function not only of market supply and demand but also of power, institutions, norms, and policy. That helps explain persistent wage differences among firms in the same sector facing similar labor pools. Dube points to UPS and FedEx or Walmart and Target as examples: nearly identical business models and labor demands, yet systematically different pay. These gaps are hard to reconcile with a fully competitive labor market and more consistent with employer wage-setting power.
What to do about it? Dube argues increased fairness in pay requires choices in public and private policy to counteract monopsony power. He points to recent progress: state and local minimum wage increases have boosted pay at the bottom where the federal floor has been stagnant, and public pressure has pushed some firms toward voluntary higher wages — Amazon’s 2018 adoption of a $15 minimum wage followed years of activist pressure from the Fight for $15 movement.
Dube recommends a range of interventions: stronger minimum wages, revitalized collective bargaining, and sectoral bargaining used in other countries to set industry-wide pay floors. He emphasizes that stagnant wages and rising inequality were not inevitable but the result of choices by corporations, policymakers, and experts who often insisted markets were working fine.
If monopsony does shape pay across many labor markets, then better policy and institutional change could raise wages and narrow inequality. The debate over how best to respond is active, but the growing body of research suggests the old Econ 101 story of perfectly competitive labor markets is an increasingly inadequate guide to understanding why paychecks are so small for many workers — and what could be done about it.
The Wage Standard is a compelling contribution to that debate; its ideas deserve wide attention.