Why do so many firms seem to pay workers less than what their labor is truly worth? Economists call this phenomenon “monopsony power”—the ability of firms to set wages below the marginal product of labor, which is the increase in output from adding one additional worker. Traditionally, this has been explained in two main ways: either because workers face costly and time-consuming job searches, or because jobs themselves differ in ways that matter to workers, like location, schedule or prestige.
My hot take. This has more to do with the complete collapse of workers abilities to relocate. With housing being so expensive moving major metropolitan markets just doesn’t seem to be done anymore.
Quote Citation: Paulina Restrepo-Echavarría, “Firms’ Wage-Setting Power: Monopsony in the Labor Market”, July 17, 2025, https://www.stlouisfed.org/on-the-economy/2025/jul/firms-wage-setting-power-monopsony-labor-market?utm_source=Federal+Reserve+Bank+of+St.+Louis+Publications&utm_campaign=ad33a87e08-BlogAlert&utm_medium=email&utm_term=0_c572dedae2-ad33a87e08-237369665