Monopsony employers paying higher wages?!

As part of my job as a researcher I like to read about different topics – I have done work on health economics, labour economics, and more recently firm level economics.  One topic that comes up across all these fields is the idea of a monopsony buyer for different things.

Looking across this blog I’ve seen monopsony discussed in terms of the labour market and in terms of migration and monetary policy.  However, I want to focus on concentration indices (as a proxy for monopsony) and wages.

My friend Chris Ball discussed this at NZAE this year and it has shown up on VoxEU and the OECD recently.  Specifically, I want to consider this point from Chris’s conclusion:

Income growth is generally higher for those in more concentrated industries after adjusting for differences in underlying characteristics. As outlined in Chapter 4 this result is subject to a number of caveats, but even so this is a surprising result because the first principles analysis of monopsony would predict income growth should be lower for those in concentrated markets.

So why could this be?  My guess is that concentrated labour markets may also have market power in product markets therefore:

  1. Concentrated markets may have higher productivity growth, allowing them to pay higher wages.
  2. Concentrated markets may be subject to greater X-inefficiency due to the incentive for owners to deal with principle-agent problems through contracts, as a result managerial staff may be able to extract greater surplus from the firm – which constitutes labour income.

I am looking forward to more interesting New Zealand work on this issue, as it is something that could be especially important for a small economy far away from the rest of the world like NZ.