Brian Easton says monopsonies – dominant purchasers – need to be restrained as much as monopolies – dominant sellers. That is what pay equity is about

This column is not about you-know-who. There are many other political bullies offshore; sometimes there are local ones, as when a politician attacks a group which cannot defend itself or a cabinet minister has a crack at local government. Nor is it a column about personal bullying such as at school, in social media or in the workplace – unacceptable though such bullying is.

Economic bullying occurs when an economic agent with market dominance imposes on others. Its most familiar form is the monopoly, the dominant supplier of some good or service which uses its position to extract ‘super-normal’ profits, often with a poor service. The alternative is competition, where there are sufficient alternative suppliers so the customers can go elsewhere. If there is insufficient competition, the state often intervenes to regulate the market competition. (Sometimes no business is dominant, but a handful of firms – of oligopolists – behave in a way which gives them a collective monopoly power to overcharge.)

However, this column is about a monopsony where the agent dominates a market by being the sole or major purchaser rather than being a monopoly seller. (The term ‘monopsony’ was introduced by Cambridge economist Joan Robinson, who would have been a Nobel economics laureate except for political reasons; prizes are not always awarded to the most worthy by a monopoly panel.)

The conventional monopsony is the business which employs workers for whom there is little alternative work. So just like a monopoly, it can increase its profits at their expense. The traditional means of offsetting such monopsony power is for the workers to unionise. The union is a monopoly with a countervailing power to the monopsonist. That is not a perfect solution, but it is better than leaving the monopsonist to exploit workers.

For various reasons, including changes to the law, unionisation is less widespread nowadays. Partly to offset this, there has been until recently a more active raising of the minimum wage, which is a floor price for labour.

The biggest monopsonistic employer is central government. It is sometimes the sole employer of an occupation, can be the largest employer by far, and very often its funding also sets remuneration rates in the private, local government and voluntary sectors. Among the affected occupations are those in education, healthcare, libraries and social work. Each is dominated by women (as Joan Robinson might have ironically observed).

This is not the same issue as equal pay, where women in the same job as men were discriminated against. In the above occupations, men working in them also have their working conditions depressed, which discourages them seeking careers there and so increases the concentration of women in the occupations. (Some 47% of female workers are in occupations where 80% or more of the employees are women.)

Note that there are occupations where the government is the direct (or indirect) remuneration-setting authority but it is unable to use its monopsony powers. Were it to treat doctors as it treats nurses, they would all move off overseas. Lower skilled women are less internationally mobile. A major issue is whether there are alternative employments to escape the monopsonist’s power. Many workers can leave an exploited occupation, but they lose using their – often socially valued – skills.

In this case the government is behaving just like a business, minimising its costs. Its benefit is not profit, but lower taxes. Taxpayers are the ultimate beneficiaries of the government using its monopsony power.

Should the government use its power to bully? That is a political decision. My impression is that the majority of the public says it should not, although many might not be as enthusiastic if they understood a ‘no’ meant higher taxation.

There has been legislation to offset the bully-power. In 2020 the Ardern-Robertson Labour Government amended the Equal Pay Act to replace the government using its monopsony to set wages by an alternative wage-setting process called ‘pay equity’, where remuneration is set so that there is similar remuneration between occupations in which different work is deemed to be of the same ‘value’. It is another irony that the Luxon Coalition Government has just repealed the pay-equity process (without even going through the select committee), using its monopoly power in Parliament to legalise using its monopsony power in labour markets. (Here is an example of application of the principle is the 2017 pay-equity deal for aged and residential care workers.)

Any comparison of the ‘value’ of different occupations is fraught with difficulties. To give a simple example, suppose the government was a monopoly supplier of oranges and used its market power to set their price. (The example is not quite a parallel, since one does not have to consume oranges – not as true for, say, healthcare.) Suppose it was decided that the government power to set the price of oranges should be replaced by pricing oranges to make them of equal ‘value’ to other fruit with the same characteristics. Except that there is no fruit quite like an orange. (OK, there are mandarins but assume that the government is a monopoly supplier of them too.) Any price-setting exercise is going to be complex and contentious.

It is even more complicated in the case of an occupation. The approach is to break down each job into components of efforts, skills, responsibilities and working conditions and compare each component with a job in the labour market where it is more competitive. The individual components in an occupation will be numerous and some will be unique or near unique. Sometimes the private sector comparison occupation seems weird but it may be only looking at a single component and other occupations will be used for other component comparisons. Then there is the complicated exercise of combining the individual comparisons.

Yes, the exercise is difficult but that is not a justification for the state, or any other monopsony, using its power to suppress workers’ wages, any more than a monopoly should be allowed to use its power to hike prices. That’s my opinion, anyway. I abhor all bullies.

Note. The Treasury estimates the fiscal savings from repealing the pay equity legislation is $1.8b in the 2025/26 fiscal year. That is sufficient to fund its Investment Boost initiative costing $1.7b and have a little bit over.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014.