The story of why many paychecks stay small begins with a word: monopsony.
In the early 1930s outside Cambridge, economist Joan Robinson coined that term during a conversation with B.L. Hallward. Economists had long used models of perfect competition — endless firms, free movement of workers, and no one able to set wages — but Robinson wanted a concept for the opposite: markets where a single buyer has leverage. In labor markets the buyer is the employer, and monopsony describes the employer-side market power that lets firms push wages down.
For decades monopsony was treated as a curiosity — something you might see in mining towns or highly specialized labor markets — while textbooks stuck with the competitive model. The conventional view held that if firms underpaid, workers would move on and government wage floors would cost jobs. That view began to crack in the 1990s when David Card and Alan Krueger found that raising New Jersey’s minimum wage did not reduce fast-food employment. The result forced economists to rethink assumptions about worker mobility and employer power.
Since then researchers have documented monopsony-like features in many labor markets. In The Wage Standard: What’s Wrong in the Labor Market and How to Fix It, Arindrajit Dube argues that monopsony is far more common than once thought — even in markets that look competitive — and that it helps explain long-term wage stagnation and rising inequality in the United States.
Dube describes three widespread sources of employer market power.
– Concentration: Local labor markets for particular jobs often have only a handful of employers. When options are limited — studies often show the effective competition for a given job is comparable to only a few firms — workers have fewer places to go, and employers face less pressure to raise pay.
– Search frictions: Changing jobs is costly. Workers must find openings, apply, interview, and sometimes relocate or rearrange schedules. These frictions slow movement and let firms offer lower wages without losing employees.
– Job differentiation: Pay isn’t the only thing that matters. Proximity to home, predictable hours, relationships with co-workers or managers, and other nonwage features make some jobs especially sticky. Workers may accept lower wages to keep those advantages, similar to brand loyalty in product markets.
Beyond those structural factors, employers sometimes act intentionally to limit competition for workers. Adam Smith noted long ago that employers tend to combine to keep wages down. Contemporary examples include the no-poaching agreements among major tech firms, where companies informally agreed not to recruit engineers from one another. High-profile revelations — including an email from a top executive at one company to another asking to stop recruiting — led to prosecutions and settlements. Those episodes show how firms can deliberately restrict labor mobility.
If monopsony elements are common, wage determination looks less like an impersonal market outcome and more like a product of institutional power. Firms with greater hiring power can set wages below what a fully competitive market would deliver. This helps explain persistent pay differences between firms that otherwise seem similar: companies such as UPS and FedEx or Walmart and Target operate in the same spaces yet pay systematically different wages. Those gaps are much harder to reconcile with a model of atomistic competition.
What can be done? Dube argues that policy and institutions matter. A stagnant federal minimum wage, weakened antitrust enforcement, declining union coverage, and corporate choices that deprioritized pay fairness all contributed to eroding workers’ bargaining power. Reversing those trends can increase fairness and raise pay.
Practical steps include stronger minimum wages, renewed support for collective bargaining, and sectoral bargaining that sets industry-wide standards as used in some other countries. Public pressure and local policy have already moved the needle in places: state and municipal minimum wage increases and organizing efforts like Fight for $15 helped push some employers — notably Amazon in 2018 — to adopt higher wage floors.
If monopsony helps explain today’s labor-market dynamics, it means rising wages and reduced inequality are feasible outcomes of deliberate policy choices, not inevitable economic forces. The familiar Econ 101 story of perfectly competitive labor markets is often an inadequate guide to why many workers earn so little. Recognizing employer market power reshapes both diagnosis and remedy, and Dube’s book is a useful contribution to that reconsideration.