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.