Monopoly Power Suppresses Your Pay (The Evidence)

Most people think of monopoly as a story about prices at the store. The bigger cost may sit in your paycheck. Monopoly power and wages are linked through a simple mechanism: a worker with only one or two realistic employers has no leverage, and an employer with no rivals for talent has no reason to pay more. Economists have started measuring that effect, and the numbers are large.

What is monopsony, and why does it lower pay?

A monopoly is a seller with too much power. A monopsony is a buyer with too much power. In the labor market, workers sell their time and employers buy it. If a county has one hospital system, one big warehouse operator, and one school district, those buyers hold most of the cards.

In a textbook competitive market, if an employer pays below the going rate, workers leave for a rival. When rivals are scarce, or switching is costly, workers stay and accept less. The employer keeps the difference as profit. Economist Joan Robinson coined the term in the 1930s, and the idea sat on the shelf for decades because the data to test it were missing. That changed when researchers started analyzing millions of job postings.

How big is the wage penalty from employer concentration?

The leading evidence comes from Azar, Marinescu, and Steinbaum, who matched online job ads to measures of employer concentration across local labor markets. They found that postings in highly concentrated markets paid substantially less. Their headline estimate: moving from a less concentrated market to a much more concentrated one is associated with posted wages roughly 17% lower.

The effect is not evenly spread. Rural areas, smaller metros, and specialized occupations like nursing or skilled trades tend to have fewer competing employers. Those are also places where moving for a better offer means selling a house and leaving a family. Geography is its own form of lock-in.

What other tools do employers use to limit competition?

Concentration is only one lever. Employers have several that reduce what workers can do with their time.

Noncompete agreements. Research by Starr, Prescott, and Bishara estimates that about 18% of U.S. workers are covered by one, including many people in jobs that involve few trade secrets. A noncompete tells a worker that taking a better offer from a nearby rival may trigger a lawsuit.

No-poach and wage-fixing deals. The Department of Justice and the Federal Trade Commission have pursued cases where firms agreed not to recruit each other's staff. Those agreements remove the one thing that lifts wages in a tight market, which is a rival bidding for the same worker.

Weak organized labor. Unions are the traditional counterweight to employer power. Union membership fell from about 20% of wage and salary workers in 1983 to about 10% in 2023 (Bureau of Labor Statistics). For the long arc, see the history of the labor movement.

Mandatory arbitration and high switching costs. Health insurance tied to a job, relocation expenses, and licensing rules that do not transfer across states all make leaving costly even when another employer exists.

How do monopoly power and wages connect over time?

The mechanism is old. What is new is the evidence. For much of the twentieth century, economists treated labor markets as competitive by default. That assumption shaped antitrust law, which focused on consumer prices. The 2023 federal merger guidelines changed course by explicitly treating labor markets as a place where mergers can do harm.

The trend matters alongside the pay data. Workers' share of national income has drifted down since 2000 (see labor's share of income), and CEO pay at large firms now runs roughly 290 to 340 times typical worker pay (EPI), which we cover in the CEO-to-worker pay ratio. Not all of that traces to concentration. Technology, trade, and policy matter too. But the monopsony findings give a concrete, measurable reason why pay can stall even when output rises.

Does a higher minimum wage fit in here?

It fits closely. In a competitive market, a wage floor above the going rate would cost jobs. In a market where employers hold wage-setting power, a floor can raise pay without cutting employment, because employers were paying below the competitive wage in the first place. That is one reason studies of recent minimum wage increases have often found small employment effects (see the studies on job loss). The federal floor sits at $7.25, unchanged since 2009 (U.S. Dept. of Labor), long enough for many employers to have grown comfortable with it.

Which workers are most exposed?

Concentration does not hit evenly. Workers with specialized skills in thin markets feel it most: nurses in a county with one hospital system, teachers in a district with one employer, and technicians in a town built around a single plant. Their skills are valuable but not easily moved, so a lack of local rivals matters a great deal.

Low-wage workers face a related problem. Their employers may be numerous, but the workers cannot easily afford to quit and search, since a gap in pay can mean missed rent. That lowers the real threat of leaving, which is the source of bargaining power. Workers with caregiving duties, transportation limits, or immigration constraints face even more friction.

This is why the labor market looks less like a market of equals than a set of bilateral deals, where one side can wait and the other cannot. A wage floor and the freedom to switch jobs are two ways to even out that waiting game.

What would restore competition for workers?

Policy options are straightforward, and they sit on both sides of the aisle:

• Enforce antitrust law in labor markets, including merger review that counts effects on wages.
• Limit noncompetes, especially for lower-wage workers.
• Protect the right to organize.
• Raise and index wage floors so a worker's baseline does not depend on local concentration.

For the wider picture, see the pillar piece on income inequality in America and why the American dream is broken.

The deeper cause is that U.S. rules protect the buyer of labor more than the seller. Antitrust looked at the price of goods and missed the price of work. A wage floor that has not moved in more than fifteen years leaves each worker alone to bargain with firms that have the advantage in numbers, information, and alternatives. Wages are not low only because workers lack skills. They are low because workers lack options.