An interesting read. Quantifying the relative power of employee vs employer in the manufacturing sector. I wish they could have gone further back. Monopsony in the US Labor Market - American Economic Association The abstract: From a summary of the paper: Figure 4:
Wait, are these authors arguing that incremental revenues should see labor costs as 100% of that incremental revenue? Because that would make zero sense.
No, the authors are arguing that when labor markets are more competitive, more of the incremental revenues are paid to labor.
In a “perfectly competitive” market equilibrium would be when wages equal revenues and an employee receives the entire value of his or her labor. Ideally you would keep hiring until the marginal cost and labor demand lines intersect. Then the wage is set by the supply line. Few markets reach that exact point but there is incentive to go right up to it. In the model, the marginal cost and supply lines diverge because hiring a new employee at a higher wage implies existing wages also rise. The more market power the employer has, the more the MC and labor supply lines diverge, with the labor supply line flattening more and more, thus driving the intersection of the MC and supply curves down to lower and lower wages. Monopsonies have outsized influence over the supply curve. Typically employees have little power to replace the job. This is a classic coal-field scenario. Coal mines are generally surrounded by no comparable industry. It’s all McJobs. The supply line is flattened. The mine owner(s) makes a fortune from the huge “markdowns” the model enables because they are capturing much more of the value of the labor. In that one, it ends up at 6 employees at $6. You can see if the supply line flattened more, it would be the same number of employees at lower wages as the line gets flatter.
So how does this model and ratio work if there are other options to marginal domestic labor - such as automation and offshoring?
good Q. that wonky analysis assumes capital is fixed & the production function is separable. when that is not the case, like in reality, the marginal product of labor is a function of capital!! the wages = revenue line is false even with constant capital. I guess he meant the marginal revenue product of labor. wages = revenue should be obviously nonsensical.
There is no revenue line. And indeed, that is obviously a simplified theoretical model. The wages=revenue is where the classic S and D lines meet. Any point other than that is an obvious inefficiency. I suppose I was *hinting* that in a perfect world, MC would closely track S, although I don’t know a realistic situation in which those lines would not diverge. The MC line exists because of this inherent reality. The point is that when employers have outsized influence, those lines diverge more dramatically. That is pretty much the gist of a monopsony. The model is sound, but of course does not include every real-world factor. It is simply a baseline concept.
Good question and beyond my scope. My GUESS is that the S line (the supply of labor) flattens more, lowering wages at the same D and MC intersection. IOW, lower wages for the same supply of labor. And that seems to be the entire point of those options also. Maybe the marginal cost line also flattens, which could move the intersection with D to a higher wage, but machines are also expensive. I wouldn’t expect it to flatten at the same rate as S. This is also a coalfield problem. Coal miners don’t use shovels and picks. They are electricians and mechanics, mainly. Roof-bolters and rock dusters do some fairly manual labor, but even they are mainly operating machines. And that’s just deep mines. Strip jobs are even more automated. Automation has replaced humans. And wages also went down with the numbers of workers.
