Monopsony and Truck drivers.

(Originally published October 2021, when everyone was talking about the shortage of Lorry drivers).

One of the big problems with supply chains in many countries across the world in 2021 is a shortage of truck drivers. However, this shortage is not new in the UK and has been building for almost 5 years. One explanation is the nature of the wage-setting process, which means that firms set the wages “too low” in order to maximise profits.

The term “monopsony” was first used by Joan Robinson in her book Imperfect Competition, published in 1932. In fact, she had asked a Cambridge classicist for a proper Greek term to replace the rather ugly “monopoly seller” which was in use previously. It soon caught on and enjoyed a boost with the theory of efficiency wages in the 1970s. Its sister term “oligopsony” is rather less commonly used. What has monopsony got to do with the current shortage of Truck drivers in the UK and across Europe and many other parts of the world? Why should the pandemic have made the problem suddenly so bad?

In a perfectly competitive market with perfectly flexible wages or prices, demand always equals supply and everyone can trade as much as they want to. For the perfectly competitive firm, marginal cost equals price. A monopolist, however, restricts supply so that the price increases. To maximize profits, the monopolist wants to equate marginal revenue with the marginal cost of production. Since the demand curve is downward sloping, the marginal revenue of an additional unit of output is less than the price. Hence, the monopolist chooses a price which is greater than marginal costs (there is a monopoly markup).  This results in equilibrium in a situation where there is (voluntary) “excess supply”, in the sense that the monopolist would be willing to supply more at the price it sets. It chooses not to supply more, because the ensuing reduction in price would cause profits to fall.

The monopsonist faces the mirror image of this problem. Let us take the example of the employer setting wages. The employer faces an upward sloping supply of labour. To get more workers, it needs to raise the wage. The demand curve for labour is the marginal product of labour employed (or marginal revenue product if it is a monopolist in the output market).  The cost of an extra unit of labour exceeds the wage: to get another worker you will need to raise the wage (assuming an upward sloping labour supply curve). This is called the marginal cost of labour MCL (not to be confused with the usual marginal cost curve).  The MCL lies above the usual supply curve for labour. The monopsonist equates the MCL with the marginal (revenue) product of labour.  This means the wage set is below the wage which equates labour supply with demand and there is an “excess demand” for labour. The firm would be happy to hire more labour at the existing wage. However, the monopsonist does not hire more labour because the MCL exceeds the wage (hiring more workers would increase the wage).

This creates a strange situation for the monopsonistic labour market. There is an equilibrium shortage of labour: firms are always short of labour. Many have argued that this model is especially applicable to low paid unskilled labour, the “Mac Job”.  If minimum wage laws are introduced and the wage is increases, this will result in both wages and employment increasing.

How does this apply to Truckers? Well, for the most part they are badly paid with low hourly rates and poor working conditions.  Employers continue to pay low rates even in the face of shortages of drivers.  In Britain this shortage was alleviated by the influx of drivers from Poland and Rumania prior to Brexit. However, even then many Eastern European drivers did not intend to stay for more than a few years.  After the Brexit vote Sterling fell against the Euro and the salary advantage of working in Britain was greatly reduced.  So, there was a shortage of drivers even before the pandemic. But in a monopsony market with low wage rates, it means that workers do not value their jobs and will look for alternatives. The pandemic gave many drivers the time and space to look for something else. That meant there has been an “exodus” of British drivers who have not returned ot their former occupation. 

The model of monopsonistic competition provides a model where there is an equilibrium shortage of labour. Truckers find themselves in such a market and for many years a low-wage occupation which can be unpleasant in many ways: unpredictable hours, poor facilities and low status. The average hourly rate is only around £11-13 per hour, which equivalent to an annual salary of around £20k with a normal working week.  With a minimum wage job such as stacking shelves paying almost £9 per hour, the skill premium for Trucking is negligible and hardly compensates for the working conditions.