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In today's largely nonunion labor market, the default model used by many economists and policy makers is that of textbook competition. The textbook model suggests a mutual balancing of worker and employer interests and implies that laissez‐faire and deregulation is the appropriate policy norm, but in the 1930s and before, the default model for a nonunion labor market was employer monopsony. There are many reasons to suppose that monopsony should be the default model again. A monopsonistic labor market—one where employers have market power—has a stabilizing effect at the macrolevel. Failure to recognize monopsony thus left macro policy makers surprised by the economic outcomes of the 1980s and 1990s. Yet, monopsony has a dark side in terms of income distribution and the provision by employers of wages and conditions at the microlevel. Laissez‐faire and labor‐market deregulation therefore cannot be the policy norm under monopsony.

AbstractMonopsony power by firms and social preferences by consumers are well established. We analyze how wages and employment change in a monopsony if workers compare their income with that of a reference group. We show that the undistorted, competitive outcome may no longer constitute the benchmark for welfare comparisons and derive a condition that guarantees that the monopsony distortion is exactly balanced by the impact of social comparisons. We also demonstrate how wage restrictions and subsidies or taxes can be used to ensure this condition, both for a welfarist and a paternalistic welfare objective.

Guest workers on visas in the United States may be unable to quit bad employers due to barriers to mobility and a lack of labor market competition. Using H-1B, H-2A, and H-2B program data, we calculate the concentration of employers in geographically defined labor markets within occupations. We find that many guest workers face moderately or highly concentrated labor markets, based on federal merger scrutiny guidelines, and that concentration generally decreases wages. For example, moving from a market with a Herfindahl-Hirschman Index of zero to a market comprised of two employers lowers H-1B worker wages approximately 10%, and a pure monopsony (one employer) reduces wages by 13%. A simulation shows that wages under pure monopsony could be 47% lower, suggesting that employers do not use the full extent of their monopsony power. Enforcing wage regulations and decreasing barriers to mobility may better address issues of exploitation than antitrust scrutiny alone.

What happens if an employer cuts wages by one cent? Much of labour economics is built on the assumption that all the workers will quit immediately. In this text, Alan Manning mounts a systematic challenge to the standard model of perfect competition.