How America’s Economy Is Designed for Labor Monopsony

Ever wonder why wages have been stagnant for 40 years?

Photo by Nohe Pereira on Unsplash

Some years ago, I learned a new word, “monopsony”. I haven’t been able to get it out of my head since then. I had long known the word “monopoly” and I understood the meaning of that word as a young man. But this business of monopsony, it’s a recurring theme throughout America, particularly with respect to labor. Investopedia provides a nice comparison of monopoly and monopsony here:

Both a monopoly and a monopsony signify conditions of imperfect competition, in which a single entity can influence what would otherwise be a free market operating under the laws of supply and demand. The difference between the two lies in what is being singularly controlled; in one case, the supply of the goods or services, in the other, the demand for items or the market for them.

Most definitions of monopsony describe a market where there is only one buyer. Investopedia provides more nuance by noting that a single entity, whatever that may be, can have an overwhelming influence on the price of goods and services, or in the case of monopsony, demand for goods and services.

While researching this article, I came across an interesting graph:

Google Books Ngram Viewer

What the graph tells us is that the word “monopsony” has been with us for about 200 years. It also tells us that there has been a significant increase in our collective awareness of the concept of monopsony starting in the 1920s, peaking in 1980, and with a slow decline since then.

I think I first got wind of the term while reading an article at the Institute for Local Self-Reliance (ILSR). I found articles there talking about wage suppression, wage stagnation, and labor monopsony. Here we see a phrase to describe a condition where a single entity has an enormous influence over the demand for labor. A typical example would be a mining town where the only employer is a mining company. In that town, the mining company can control the wages paid to miners because they have control over the demand for labor in that town.