In two recent papers, Matthew E. Kahn and Joseph Tracy examine the outcomes of local labor markets affected by monopsony power. They find that in areas with a high degree of monopsony power, workers earn lower wages but are compensated with lower house prices, at the expense of homeowners. Monopsony markets also experience a “brain drain” over time due to young, educated workers who leave for better opportunities. The rise of work-from-home may accelerate this dynamic by allowing talent to change labor markets without changing residences.
Tens of millions of Americans work in low-wage retail jobs at superstores such as Walmart, Target, and Best Buy. Labor economists have noted a hollowing out of “good jobs.” For some of these workers, a low-wage job is the initial rung on a career ladder to higher paying jobs. For others, the ladder is too short. Consider the example of Mendy Hughes, whom the Guardian profiled in a 2021 article:
“Mendy Hughes, 46, has worked as a cashier for Walmart in Malvern, Arkansas, for 11 years. Her hourly wage, after a recent increase, is $12.85 an hour, a mere 85 cents more than the hourly starting wage for new hires despite her 11 years with the company. ‘You can’t pay your bills, rent and buy groceries on $12 an hour. I don’t think anywhere in the United States, you can do that. No way,’ said Hughes…As the largest employer in the US with nearly 1.6 million workers, Walmart has faced criticism for years over low wages…”
Monopsonists as a disamenity
Perfectly competitive labor markets underpin the traditional economic approach to understanding a worker’s earnings. A worker embodies a bundle of skills that they sell to the local labor market. In this market, a large number of employers compete to hire and retain workers, and each firm faces the same wage and skill market conditions. If an employer attempts to pay a lower wage for a skill, workers can easily quit and take jobs with other employers paying the “market” wage. Firms pay lower wages to less skilled workers, but they do not exploit these workers. The lower wages track the workers’ lower productivity.
In recent years, a vibrant labor economics literature has challenged this competitive approach and suggested that a monopoly model of local labor markets is more appropriate. These researchers posit that a single large local employer—a “monopsonist”—has the market power to exploit workers and pay them less than a competitive wage. In this case, “capitalists”—the owners of the large firm—extract earnings from “labor” and a type of class struggle ensues. Income inequality rises as the shareholders of the firms gain from their firm’s ability to extract rents from the trapped workers.
The starting point of our research focuses on whether monopsonists in fact “trap” the incumbent workers in a low-wage market. We do not “blame the victim.” Instead, we examine the American economic geography. The United States features over 3,000 counties and hundreds of cities of different sizes and economic makeups. Each of us chooses where we are going to live. Costs of moving vary across individuals. For example, older people are less likely to migrate away from an area where they have planted roots, cultivated memories, and developed a network of family and friends.
Individuals can search across possible employers in their current labor market or relocate to a new labor market. Given that commuting is costly, most Americans only commute around one hour each day (or thirty minutes each way). If people can move at 40 miles per hour, then they will live within twenty miles of where they work. This defines the geographic scope of their local labor market based on their current residence. To broaden the set of employers, the individual will have to incur the cost of uprooting and moving.
The decision to move, however, depends not just on income prospects, but also the cost of living and local amenities. Consider Malvern, Arkansas, where Mendy Hughes lives. If the local major employer pays really low wages, why does she continue to live there? The average price of a home in Malvern is $111,267 as of May 2023, according to Zillow.
Our research paper, “Monopsony in Spatial Equilibrium,” generalizes this point. Across the U.S., we find that house prices are lower in areas where there is a greater degree of local monopsony power. This means that workers are partially compensated for being exploited. Renters in these markets, for example, experience a decline in housing prices that offsets roughly 70% of the estimated monopsony wage effect. Homeowners, though, suffer an asset value loss because of the expectation that workers who choose to live in the area will be exploited. Monopsonists are a “disamenity” to a local market.
Spatial competition is our explanation for the real estate finding we have documented. While competition for workers may be limited in some areas, locations still compete to attract workers. There is always a new generation of footloose workers. If a place such as Malvern features an unattractive local labor market, then house prices will be lower to compensate those who choose to move there and to incentivize those—like Mendy—who work there not to move.
Exploitative employers lead to brain drain
In the language of economics, there is always an opportunity cost to living in a location like Malvern, Arkansas. People differ with respect to the amenities and local services that they value, in addition to their perceived earnings opportunities. If Malvern only features employers like Walmart, then even with lower house prices the area is likely to experience a “brain drain.” Younger and more educated people will be more likely to move away to obtain more lucrative and career enhancing jobs in other locations. These same types of individuals will be less likely to move to areas with exploited labor markets. We document this point in our paper “A Human Capital Theory of Who Escapes the Grasp of the Local Monopsonist.”
An important point is that in a local market, monopsony employers impose costs not just on their workers, but also on area homeowners. This creates an incentive for a broad set of individuals in the community to support policies that promote more competitive local markets. Homeowners have an “equity” stake in the community that the monopsonist is devaluing.
Our research also points out an added dimension of the returns to human capital. More educated workers earn more not only because they have higher productivity, but also because they are more difficult to exploit by large employers. High wage workers can recover moving costs more easily than low wage workers. Groups that have historically been exploited by different societies have long recognized this—human capital is more mobile than physical capital.
Work-from-home further reduces the ability of dominant employers to exploit workers. Remote work gives individuals the ability to search across a wide set of geographically dispersed employers without the need to incur moving costs. Individuals with deep connections to their current location need not uproot themselves to earn a competitive wage provided their work can be conducted remotely and they have reliable internet service. Access to information networks, like access to transportation networks in the past, is critical to supporting local economic activity.
Labor economists have backed away from the notion of competitive local labor markets. However, as we have shown, competition takes place on several levels. While competition may be hampered within some local labor markets, competition still exists between labor markets. This geographic competition shifts the costs of non-competitive behavior within a local market to a broader set of individuals, creates incentives to address the problem, and acts as an additional constraint on rent-seeking behavior. Technological changes that, for example, allow world-wide supply chains and remote work, will continue to exert market discipline on the economic landscape.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
