Monopsony and the travails of capitalism (updated)

George Rebane

Monopsony - the market condition that exists when there is one buyer.

Nobody has said that capitalism is the perfect way to organize society and commerce; it has just beat the bejeezus out competitors since King Louis XVI lost his head in 1793.  But capitalism does have its inevitable warts.  I was reminded of one last night when reading the online edition of Prof Alan Blinder’s ‘What to Do When the Labor Market Stops Working for Workers’.  Blinder is a proto-socialist economist ensconced at Princeton, and often shares his views on capitalism with us in the pages of the WSJ.

The good professor is a fan of unions and no fan of the extra-union work-employer arbitration methods used in today’s corporate workplaces.  His point is that arbitration methods currently in use to resolve labor disputes puts the worker at a disadvantage when facing a squad of the company’s astute labor lawyers.  Blinder has a point there, especially when the worker brings nothing more than his easily replaced commodity skills to the workplace and expects more over time simply because he has put in the time.

The commodity worker is at a special disadvantage, as we would expect, when the employer is the regional monopsonist for the worker’s skills, and there are other workers who would be willing to do the same work for less – i.e. in that market such workers are willing to compete for the job by offering greater value to the employer.

What Dr Blinder and his ideological co-travelers omit from their learned discourses is that for the employer (and his customers) labor is a cost.  Providing higher paying and more numerous jobs is neither a social responsibility nor a corporation’s obligatory contribution to entitlements due.  In the final analysis of running a business, labor is also a component of financial and operational risk.  This motivates every business to place the minimum of its fortunes in the hands of its workers – best not to have any of them at all.

But that’s not our current realworld, and the Left’s solution to the labor monopsony problem is to instate the kind of anti-trust policies that have already been in force against monopolies since the late 1800s.  In short, pass new laws to break up corporations like Walmart that have become regional labor monopsonists.  Blinder cites a recent comprehensive analysis of the problem and a “more evenhanded approach” to a solution offered in “a recent provocative paper” by academics Suresh Naidu (Columbia), Eric Posner (Univ of Chicago) and Glen Weyl (Yale).  Their ‘Antitrust Remedies for Labor Market Power’ contains some thought-provoking examples of monopsony which NPK claim call for such remedies.

Predatory pricing / predatory hiring. A seller with market power may find it profitable to charge customers below-market prices in order to bankrupt an entrant into a market, then charging above-market prices after that firm disappears. In a typical pattern, a monopolist charges high prices until the entrant materializes, then charges below-market prices to prevent the entrant from acquiring customers, doing so long enough to force the entrant to quit the market, and then raising prices again. While predatory pricing can be difficult to prove, it constitutes illegal anticompetitive behavior.

If predatory pricing is a rational strategy of a monopolist, then “predatory hiring” is a rational strategy of a labor monopsonist. Imagine that a large employer—say, a hospital—in a small town pays nurses a below-market wage. A new firm enters the market, hoping to attract nurses by charging (sic) them a market wage. The incumbent responds by raising wages above the workers’ marginal revenue product, drawing on its earlier monopsony profits to fund the temporarily loss-producing strategy. The new firm quits the market because it cannot hire nurses at the market wage; then the incumbent lowers wages or worsens working conditions. The incumbent’s behavior would constitute predatory hiring, and should be considered unlawful for the same reasons that predatory pricing is.

Vertical foreclosure. Antitrust law takes a more relaxed attitude toward vertical mergers than horizontal mergers because vertical mergers do not as frequently consolidate product markets. But certain vertical mergers pose risks. Suppose an upstream seller (a manufacturer or other supplier) possesses market power and merges with one of two (or a few) downstream buyers. The merged firm then sells to the other downstream buyer (or buyers) at an elevated price, giving itself (in its capacity as downstream firm, the result of the merger) a competitive advantage. This is known as foreclosure and is illegal under the antitrust laws. Downstream product and labor markets behave similarly in this case. Suppose the market for nurse aides has two hospitals in it, both of which serve patients covered by the same HMO. Now suppose the HMO acquires hospital 1, and lowers reimbursement rates for patients served at hospital 2. This will lower labor market demand for nurse aides in hospital 2, and give hospital 1 the ability to lower wages for its own nurse aides.

So how do we resolve such real labor issues, especially in these pre-Singularity years when technology is replacing more and more workers with marginal and/or redundant skills?  Specifically, are new public policies really needed, and if so, how are they to be fashioned so that they don’t kill the golden goose of capitalism built upon the Bastiat Triangle’s private property imperative.  For once private property goes (as property rights are now fast receding), the other two sides of the triangle – liberty and security – quickly follow (as we are also experiencing).

From here on we will have so many workers along with ever fewer jobs they can do.  The USSR once claimed to have full employment by building great dams, canals, and other earthworks with wheelbarrows.  While that provided jobs for all, the economics of the approach kept all workers a jot above destitution.  As we have discussed here for more than a decade, this is a vexing problem for capitalists, especially those who are and have been successful in their careers providing products and services to enhance the lives of all.  So how do we answer the Blinders blind to the obvious problems their solutions will bring? 

[update]  Consider the above vertical foreclosure citation in light of the just announced court ruling allowing the vertical merging of ATT and Time Warner.  The difficulty of proving how such acquisitions/mergers harm the consumer markets is illustrated by this landmark loss handed to the DoJ's anti-trust division.  We note that the decision was silent on any labor monopsony factors that might have been involved. (more here)

Comments

[scenes]

Somewhat related.

I wonder sometimes if the current spate of big-deal South Bay tech companies are gaming labor in an interesting fashion. Most of them are built atop a model of selling internet advertising, and I'll bet that a minority of the employees make most of the money for the company. If you are pulling in a lot of cash, or simply don't care about profitability, perhaps there is some advantage to taking high-skills people off of the market and just parking them. They could produce products or technology with no real financial value to the company but are mostly being withheld from any competitors.

Vertical foreclosure. It seems to me that the more common model with largely the same result is to begin building the same product as your customers.

[George Rebane]

scenes 337pm - A very good pick-up on parking talent to make it inaccessible to your competition. That has been done with measurable benefit in areas of technology and marketing. Mostly it doesn't work for too long since the parked talent is usually smart enough to know they are being parked, and they will fly the coop as soon as they have enough money or get the appropriate offer.

[Don Bessee]

Everyone with a comrade Bernie bumper sticker should be required to watch a time lapse of Bernie's Socialist paradise Venezuela. Talk about killing the golden goose!

https://www.reuters.com/article/us-venezuela-pdvsa-refineries/exclusive-venezuela-eyes-first-ever-use-of-foreign-oil-for-contracts-documents-idUSKBN1J92SQ

;-)