The Real Thin Theory: Monopsony in Modern Labour Markets

Models of ‘modern monopsony’ based on job differentiation and/or search frictions seem to give employers non-negligible market power over their workers while avoiding the assumption of ‘classical monopsony’ that employers are large in relation to the size of the labour market that many labour economists find implausible. But, this paper argues that this is somewhat of an illusion because modern theories of monopsony do assume that labour markets are ‘thin’, although in a more subtle way than the classical models. The paper also argues that there is evidence that labour markets are ‘thin’ in a way that gives employers some market power over their workers. It presents a model that combines both the job differentiation and search models of modern monopsony and derives predictions about the relationship between wages and commuting. The paper uses UK data to argue that there is good evidence for these predictions: that there is a robust correlation between wages and commuting distance that is the result of worker job search in a thin labour market, that those with longer commutes are not, on average, fully compensated for them and that there is substantial ‘wasteful’ commuting. This paper was produced as part of the Centre’s Labour Markets Programme Acknowledgements Paper prepared for Adam Smith Lecture, EALE Conference, Paris, September 2002. I would like to thank Susan Powell for help with the linear programming, Andrew Benito, Alison Booth, Gilles Duranton, Yves Zenou, a referee and seminar participants at CEP and EALE for their comments. Alan Manning is a programme head at the Centre for Economic Performance and Professor of Economics at the London School of Economics. Published by Centre for Economic Performance London School of Economics and Political Science Houghton Street London WC2A 2AE  Alan Manning, submitted January 2003 ISBN 0 753