Reference code: C26-08
Why an employer and worker can agree on a wage that has already been shaped by employer labor-market power
An employer offers a wage. A worker accepts it. Most people naturally assume that the agreement establishes a fair wage for the work. Modern research on labor monopsony gives us substantial reason to question that assumption.
Suppose an employer offers a job at $20 an hour and a worker accepts it. Perhaps the employer simply stated the wage. Perhaps the parties negotiated and eventually agreed on $20. In either case, both parties consented to the employment relationship at that wage.
It is easy to treat the agreement as the end of the inquiry. The employer was willing to pay $20. The worker was willing to work for $20. Why would anyone say that $20 is not a fair wage? And, more particularly for Commons Capitalism, why would a different employer voluntarily pay the worker more?
The answer depends upon how the $20 wage came to exist. Agreement between employer and worker tells us that the worker accepted the wage available in that labor market. It does not establish that the labor market itself produced a fair wage.
The effect becomes clearer if we compare a labor market with vigorous competition for workers to one in which employers possess meaningful labor-market power.
Assume several employers need workers capable of performing the same kind of job. One employer offers $20 an hour while another begins offering $23. If workers can readily move toward the $23 jobs, the $20 employer faces a practical problem. Applicants may go elsewhere. Existing workers may leave. The employer either raises compensation or risks being unable to obtain and retain enough labor.
Competition among employers therefore puts upward pressure on wages. The worker does not have to persuade the employer that $20 is unfair. Competing employment opportunities do the work. They give the worker an alternative, and the existence of that alternative limits the employer’s ability to hold the wage at $20.
Now change the labor-market conditions. Suppose employers can continue obtaining the workers they need at approximately $20. Comparable employers may be paying similar amounts, workers may have fewer attractive alternatives, or workers may not move among employers readily enough to force wages upward. The $20 wage can persist even though stronger competition for labor would have produced a higher wage.
The same work can therefore command different wages depending upon the degree of competition among employers for the workers who perform it. That is the point at which labor monopsony becomes relevant.
Labor monopsony is market power on the employer side of the labor market. It exists when an employer has some ability to influence the compensation it pays rather than simply accepting a wage imposed by vigorous competition for workers.
David Card’s 2022 presidential address to the American Economic Association reviewed the modern research on monopsonistic wage setting and described a growing consensus that firms possess some wage-setting power. The significance of that conclusion is straightforward: the wage offered to a worker is not always a price that competition has fully determined for the employer. The employer may have room to hold the wage below the level stronger competition would produce.
The federal antitrust agencies recognize the same relationship. The Department of Justice and Federal Trade Commission’s 2023 Merger Guidelines treat employers as buyers of labor and expressly recognize that reduced competition among employers can result in lower wages, slower wage growth, weaker benefits, or worse employment terms. The agencies examine whether employers can worsen those terms without losing enough workers to make the conduct impracticable.
Monopsony does not mean that every employer can name any wage it wants. Nor does it mean that every low wage results from employer market power. It means that the competitive force that would otherwise bid wages upward can be weaker than the simple competitive model assumes.
This is not merely a theoretical possibility.
José Azar, Ioana Marinescu, and Marshall Steinbaum studied more than 8,000 geographic and occupational labor markets in the United States. They found that the average market in their data was highly concentrated under the federal concentration thresholds then in use. More importantly for the wage question, moving from the 25th percentile to the 75th percentile of labor-market concentration was associated with a 17 percent decline in posted wages. Their finding provides direct empirical evidence that the structure of the labor market can materially affect the wage employers offer for work.
The U.S. Department of the Treasury reached a similar conclusion from a much broader review of the evidence. Its 2022 report concluded that American labor markets fall substantially short of perfect competition and estimated that lack of labor-market competition reduces workers’ wages by roughly 20 percent relative to what they otherwise would earn.
These estimates are not formulas for adjusting every American wage. They do not mean that every worker is underpaid by 17 or 20 percent. They establish a more important point for this Commentary: employer labor-market power is capable of materially changing the wage structure. The wage that becomes customary, prevailing, offered, negotiated, and accepted can already reflect diminished competition for labor.
Suppose $20 is not merely one employer’s offer. Nearly every comparable employer pays approximately $20. That makes the wage appear even more convincing. It is the going wage.
But the going wage is produced by the same labor market we are examining. If employers throughout that market possess enough wage-setting power to obtain workers at approximately $20, the prevalence of the wage does not eliminate the effect of that power. It can be one of its results.
Stronger competition among employers might push the wage to $22, $23, or another higher amount. Under weaker competition, $20 can remain the going wage because employers can continue hiring and retaining the workers they need at that amount.
The going wage therefore tells us what employers currently must pay to obtain labor in the existing market. It does not necessarily tell us what constitutes a fair wage for the work.
None of this requires an involuntary employment relationship.
The worker may knowingly accept $20. The worker may regard the wage as adequate. The worker may also know that the wage will not fully meet household expenses and respond by cutting expenses, postponing purchases, taking on additional work, or incurring debt. If the worker refuses the job, another worker may accept it.
Those circumstances do not themselves establish monopsony. The economic evidence concerning employer market power does that work. They explain why the worker’s acceptance cannot settle the fairness question. The worker chooses among the employment opportunities that actually exist, and those opportunities can already reflect the wage structure created by the labor market.
Even genuine bargaining does not change the basic point. A bargain reflects the alternatives available to both parties. A worker with several better offers bargains from a different position than a worker whose realistic alternatives pay approximately the same amount. The parties can bargain in good faith and reach a voluntary agreement without the resulting wage becoming proof of its own fairness.
Monopsony research does not give us a mechanical formula for a fair wage. Its importance is that it prevents us from treating the going wage as the answer merely because employer and worker agreed to it.
A fair wage exists within real economic limits. A productive enterprise must remain profitable. It needs enough earnings to maintain and replace assets, adopt technology, service legitimate obligations, preserve reserves, withstand adverse conditions, and make the investments necessary to remain competitive.
But the fact that a business can obtain workers for $20 answers a different question. It tells us what the existing labor market permits the employer to pay. It does not establish that $20 fairly compensates the worker.
That distinction matters because Commons Capitalism does not use the lowest wage at which the enterprise can obtain adequate labor as the final measure of worker compensation.
A Commons Capitalism Entity operates in the same market economy as conventional employers. It can observe the going wage and may discover that comparable employers pay $20 an hour and that qualified workers are readily available at that wage.
The CCE does not assume from those facts that $20 is the fair wage. It can instead determine the fair wage it seeks to provide and compare that amount with the going wage produced by the surrounding labor market.
When the going wage falls below that fair-wage benchmark, the difference creates a fair-wage gap. Subject to the financial capacity of the CCE, the Commons Corporation should pay a fair-wage supplement to close some or all of that gap.
The supplement is not a guaranteed entitlement and the fair-wage benchmark does not create an enforceable worker claim to a particular amount. Commons Capitalism does not transform uncertain business earnings into guaranteed resources. The amount that can be provided depends upon the continuing profitability, obligations, reserves, reinvestment requirements, and financial condition of the CCE. The Board retains discretion to reduce, defer, phase in, or withhold the supplement when payment would create material adverse consequences for the CCE, its workers, or the surrounding community.
The accounting treatment reflects the institutional design. The fair-wage supplement is not charged as an expense against the net profit generated by the Subsidiary. The Subsidiary’s operating performance is therefore measured without reducing its net profit by the supplement. The supplement is recorded as an expense of the Commons Corporation in arriving at the Commons Corporation’s reasonable net profits.
That distinction matters because the Subsidiary remains responsible for operating profitably in its market, while the Commons Corporation determines how the economic resources of the CCE are used to carry out the broader worker-benefit purposes of the institution.
The CCE still must remain financially sound. It must reinvest, maintain reserves, service legitimate financing obligations, preserve productive capacity, and survive difficult years. A fair wage cannot be detached from those requirements.
But neither does Commons Capitalism treat the wage that the existing labor market permits an employer to pay as the final measure of what the worker fairly ought to receive. If the going wage is $20 and the CCE can sustainably provide additional compensation, the fair-wage supplement allows the Commons Corporation to move compensation toward the fair wage without treating the going wage as conclusive.
The absence of a private residual shareholder is important to that choice. Money retained by the CCE does not ultimately increase a private owner’s residual claim. The Commons Corporation can therefore weigh fair compensation alongside reinvestment, reserves, financial strength, worker benefits, and future growth without a private residual claimant standing at the end of the distribution chain.
An employer and a worker can agree upon a wage without establishing that the wage is fair. Their agreement shows that employment could be formed at that wage under the labor-market conditions then confronting them.
The monopsony research matters because it shows that those labor-market conditions can materially affect the wage itself. Where competition among employers is weaker, employers can possess wage-setting power, and empirical research shows that greater employer concentration and diminished labor-market competition are associated with materially lower wages.
The going wage can therefore be a real market wage, a commonly paid wage, a voluntarily accepted wage, and even a genuinely bargained-for wage while still falling below a fair wage.
Commons Capitalism responds to that possibility directly. It distinguishes the going wage from the fair wage. When a fair-wage gap exists, the Commons Corporation should use a fair-wage supplement, to the extent the CCE can sustainably afford it and the Board determines payment is institutionally prudent, to close some or all of that gap.
The supplement is an institutional use of CCE resources, not an adjustment that reduces the Subsidiary’s measured net profit and not an enforceable claim by the worker. It is an expense of the Commons Corporation in arriving at the Commons Corporation’s reasonable net profits.
Commons Capitalism therefore does not ask only what the labor market requires the enterprise to pay in order to obtain workers. It asks what compensation is fair to the people performing the work and how much of the difference between the going wage and that fair wage the CCE can responsibly provide while preserving the financial strength of the institution.