How much employer market power does the US manufacturing sector have?
Source: World Image
Recently, the Biden administration’s Treasury Department highlighted concerns that monopsony power is hurting workers. In particular, the department underscored the role that competitive labor markets play in fostering “the economic freedom to switch jobs or negotiate a higher wage.”
But how much market power do US employers have?
In a paper in the American Economic Review, authors Chen Yeh, Claudia Macaluso, and Brad Hershbein estimated markdowns in the US manufacturing sector and found that most manufacturing plants do in fact operate in a monopsonistic environment.
Markdowns are the ratio between wages and what economists call the marginal revenue products of labor. This marginal revenue product of labor measures the change in revenue that results from employing an additional unit of labor.
When labor markets are perfectly competitive, markdowns are equal to one, so that every marginal dollar in revenue goes to labor. But as Figure 4 from the authors’ paper illustrates, aggregate markdowns in the US manufacturing sector have deviated significantly from the ideal, especially in recent years.
Figure 4 from Yeh et al. (2022)
The chart shows aggregate markdowns across US manufacturing plants from 1977 to 2012. The gray band is a 95 percent confidence interval.
The estimates reveal that markdowns fell significantly over the 1980s and 1990s. But since 2002, they have increased sharply—meaning that the marginal revenue going to workers has decreased.
Overall, the authors found that a plant’s marginal revenue product of labor was on average 53 percent higher than the wage it pays its workers, implying that workers received about 65 cents on the marginal dollar generated.
The findings are evidence of monopsony in US manufacturing and suggest a departure from an efficient labor market.
“Monopsony in the US Labor Market” appears in the July 2022 issue of the American Economic Review.