Academic journal article Journal of Economics and Economic Education Research

Do Defined Benefit Pensions Create Monopsony Power? Evidence from the Academic Labour Market

Academic journal article Journal of Economics and Economic Education Research

Do Defined Benefit Pensions Create Monopsony Power? Evidence from the Academic Labour Market

Article excerpt


Labour economists have demonstrated a renewed interest in monopsony over the last two decades (Ashenfelter et al., 2010). Developments in empirical industrial organization and the job search literature have inspired theoretical and empirical extensions that explore the sources of monopsony power (Boal and Ransom, 1997). Of particular interest here is the role of "moving costs" in allowing firms to engage in the post-hire exploitation of workers. "Moving costs" are the pecuniary or psychic costs that workers incur when changing employment from one firm to another (Boal and Ransom, 1997). "Moving costs" become a source of monopsony power for employers over employees once they are hired because employees would require a large increase in salary to switch employers (Black and Lowenstein, 1991). Ransom (1993) applied the idea of "moving costs" in analysing the academic labour market. He argued that incumbent professors face high moving costs and that these moving costs accounted for the unusual finding of a negative correlation between real wages and seniority. The market for newly hired faculty, however, remains competitive because all new hires must pay moving costs.

This paper applies the concept of "moving costs" in analysing varying degrees of monopsony power between universities within the academic labour market. We argue that the composition of professors' total compensation packages affect the level of "moving costs" and therefore the degree of monopsony power universities possess over incumbent professors. More specifically, compensation packages with defined benefit (DB) pension benefits increase the moving costs for faculty leading to monopsonistic exploitation of incumbent faculty. Recently, Costrell & Podgursky (2010) have demonstrated that state retirement pension systems impose mobility costs on K-12 teachers in Missouri. We hypothesize that these mobility costs largely account for a negative relationship between the presence of DB pension plans and the total level of compensation for university professors. We will be using data from AAUP to test this hypothesis.

The rest of the paper will proceed as follows. First, we look at the economics literature covering moving costs as a source of monopsony power, empirical studies on salaries and seniority in the academic labour market and salary differentials between private and public universities. Then we discuss how the presence of a DB pension as part of a professor's compensation package increases "moving costs" for incumbent professors thereby increasing the monopsony power of those institutions. Next, we describe the econometric model employed to test the hypothesis of a negative relationship between DB pensions and the total level of compensation for university professors. Last, we discuss the results of our analysis and the scope for future research.


Moving Costs and Monopsony Power

Black & Lowenstein (1991) introduce a model of a "labour market where workers find it costly to change employers; these costs that may reflect such factors as locational preferences, relocation expenditures, search costs and psychic costs stemming from the stress of changing jobs. Because a worker finds it costly to switch employers in the future, the initial acceptance of employment creates a specific asset that may allow the employer to act opportunistically" (Black & Lowenstein, 1991). In their model, employers are unable to make credible commitments regarding future compensation and given the high moving costs of employees, can renegotiate existing workers' wages below their marginal revenue product (MRP). In other words, employers engage in monopsonistic exploitation. Anticipating ex-post opportunism, the wages of new hires, according to this model, will be front-loaded. Such opportunism also causes low-mobility cost workers to switch to new employers while employers engage in wage discrimination among remaining employees based on observed differences in moving costs. …

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