Over the past several years, policy makers and economists have increasingly voiced concerns about apparent labor-market monopsonies—markets in which employers have the power to set wages—in certain industries and areas of the country. Some have further suggested that monopsony power may help explain the slow wage growth of recent decades.
One such market, according to Chicago Booth’s Austan D. Goolsbee and Chad Syverson, is higher education. They find that US institutions of higher education have meaningful monopsony power over tenure-track faculty, although not over nontenure-track faculty—which could help explain the rising use of adjunct instructors in recent years.
Monopsony power is the flip side of monopoly power, in which a seller can raise prices higher than it could in a perfectly competitive market and continue to sell products to buyers, because those buyers have or perceive limited options for going elsewhere. Conversely, to sell more product, the seller must reduce its price.
With monopsony, it is the buyer that has market power. The buyer can lower its offer and still find willing sellers but must raise its offer to find more. In the context of the labor market, a monopsony employer has to raise wages to hire more workers. Consider the example of a company town, in which the anchor company has monopsony power but also an essentially fixed number of workers living in town. If it wants to hire more workers, it has to raise wages to entice others to move there. The stronger the relationship between wages and hiring, the greater the monopsony power on display.
Researchers have long suggested that institutions of higher education may hold monopsony power stemming from both their labor practices and the high switching costs that tenured faculty members face when changing schools. Using data from the Integrated Postsecondary Education Data System, Goolsbee and Syverson tested this theory over the period from 2002 to 2017, across 1,650 institutions.
More-prestigious schools, especially doctoral universities with high research output, had higher monopsony power over tenure-track faculty.
They find that the power appears greatest over full professors, lessening for associate professors and further still for assistant professors. This finding is consistent with “tenure track faculty’s willingness or ability to switch to another employer falling with rank, a result we find intuitive,” they write. On the other hand, the researchers do not find any such power over nontenure-track faculty.
They don’t find any meaningful differences in the monopsony power of private and public institutions, nor with respect to institutions’ monopsony power over male and female faculty. They do, however, find that monopsony power in the higher-education industry increased at a “small but significant rate” over the 14 years studied.
Turning to the determinants, the researchers find that monopsony power is related to institution size: the larger schools in their study sample had more power. Moreover, they find a strong relationship between prestige and monopsony power. School prestige is measured by the Carnegie Classification, a framework for classifying US colleges and universities. More-prestigious schools, especially doctoral universities with high research output, had higher monopsony power over tenure-track faculty. Schools whose incoming students had the highest SAT scores also held greater monopsony power than other schools; in fact, such power was concentrated among the 400 schools in the top quartile of student SAT scores. Schools with lower scores seemed to have no monopsony power over even tenure-track faculty.
Some observers of the higher-education industry have suggested that the monopsony power of academic institutions can explain their growing use of adjunct faculty. “The presence of market power over the tenure track part of the faculty gives universities an incentive to shift to non-tenure track labor when demand rises (in order to prevent driving up tenure track wages),” write Goolsbee and Syverson. Consistent with this theory, they find that schools with more monopsony power—for example, larger schools and those whose incoming students have higher SAT scores—saw a bigger increase in the share of nontenure-track faculty over the time period studied. They conclude that “monopsony has likely played some role in the rise of adjunct faculty in recent years.”